UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

~~For the quarterly period ended June~~
For the quarterly period ended September 30, 2022 or

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

~~For the transition period from ______ to ______~~

For the transition period from ______ to ______

Commission File Number: 0-26128

Finward Bancorp

(Exact name of registrant as specified in its charter)

	Indiana	35-1927981
	(State or other jurisdiction of incorporation	(I.R.S. Employer Identification Number)
	or organization)


	9204 Columbia Avenue
	Munster, Indiana	46321
	(Address of principal executive offices)	(ZIP code)

Registrant's telephone number, including area code: (219) 836‑4400

	N/A
	(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which

registered

Common stock, no par value

FNWD

The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒

Smaller Reporting Company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were ~~4,297,900~~4,297,799 shares of the registrant’s Common Stock, without par value, outstanding at ~~August 15,~~November 14, 2022.

Finward Bancorp

Index

	Page
	Number
PART I. Financial Information

Item ~~1. Unaudited~~1.Unaudited Financial Statements and Notes	1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2928

Item 3. Quantitative and Qualitative Disclosures about Market Risk	4243

Item 4. Controls and Procedures	4243

PART II. Other Information	4344

SIGNATURES	4445

EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications
101 XBRL Interactive Data File

Finward Bancorp

Consolidated Balance Sheet

(Dollars in thousands)	September 30, 2022 (unaudited)			December 31, 2021

ASSETS

Cash and non-interest bearing deposits in other financial institutions	$	26,463		$	12,725
Interest bearing deposits in other financial institutions		11,151			19,987
Federal funds sold		682			464

Total cash and cash equivalents		38,296			33,176

Certificates of deposit in other financial institutions		2,214			1,709

Securities available-for-sale		359,035			526,889
Loans held-for-sale		997			4,987
Loans receivable, net of deferred fees and costs		1,502,696			966,720
Less: allowance for loan losses		(13,398	)		(13,343	)
Net loans receivable		1,489,298			953,377
Federal Home Loan Bank stock		3,038			3,247
Accrued interest receivable		6,849			5,444
Premises and equipment		43,865			31,385
Cash value of bank owned life insurance		31,754			31,440
Goodwill		22,615			11,109
Other intangible assets		5,188			3,126
Other assets		49,837			14,854

Total assets	$	2,052,986		$	1,620,743

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Non-interest bearing	$	386,137		$	295,294
Interest bearing		1,446,827			1,138,907
Total		1,832,964			1,434,201
Repurchase agreements		21,966			14,581
Borrowed funds		56,174			-
Accrued expenses and other liabilities		23,859			15,346

Total liabilities		1,934,963			1,464,128

Commitments and contingencies

Stockholders' Equity:
Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding		-			-
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: September 30, 2022 - 4,297,900 December 31, 2021 - 3,480,701		-			-
Additional paid-in capital		68,826			30,430
Accumulated other comprehensive (loss) income		(79,839	)		4,276
Retained earnings		129,036			121,909

Total stockholders' equity		118,023			156,615

Total liabilities and stockholders' equity	$	2,052,986		$	1,620,743

~~Finward Bancorp~~

~~Consolidated Balance Sheet~~

(Dollars in thousands)

June 30, 2022
(unaudited)

December 31,
2021

ASSETS

Cash and non-interest bearing deposits in other financial institutions
$ 20,844 $ 12,725
Interest bearing deposits in other financial institutions
55,602 19,987
Federal funds sold
2,856 464

Total cash and cash equivalents
79,302 33,176

Certificates of deposit in other financial institutions
1,482 1,709

Securities available-for-sale
400,466 526,889
Loans held-for-sale
1,525 4,987
Loans receivable, net of deferred fees and costs
1,474,381 966,720
Less: allowance for loan losses
(13,406 ) (13,343 )
Net loans receivable
1,460,975 953,377
Federal Home Loan Bank stock
3,038 3,247
Accrued interest receivable
6,892 5,444
Premises and equipment
45,985 31,385
Cash value of bank owned life insurance
31,571 31,440
Goodwill
22,615 11,109
Other intangible assets
5,588 3,126
Other assets
42,046 14,854

Total assets
$ 2,101,485 $ 1,620,743

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:

Non-interest bearing
$ 370,567 $ 295,294
Interest bearing
1,546,648 1,138,907
Total
1,917,215 1,434,201
Repurchase agreements
24,536 14,581
Accrued expenses and other liabilities
23,080 15,346

Total liabilities
1,964,831 1,464,128

Commitments and contingencies

Stockholders' Equity:

Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding
0 0
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: June 30, 2022 - 4,296,949 December 31, 2021 - 3,480,701

Additional paid-in capital
68,623 30,430
Accumulated other comprehensive (loss) income
(57,781 ) 4,276
Retained earnings
125,812 121,909

Total stockholders' equity
136,654 156,615

Total liabilities and stockholders' equity
$ 2,101,485 $ 1,620,743

See accompanying notes to consolidated financial statements.

Finward Bancorp

Consolidated Statements of Income

(unaudited)

(Dollars in thousands)	Three Months Ended June 30,				Six Months Ended June 30,				Quarter Ended September 30,				Nine Months Ended September 30,
(Unaudited)	2022		2021		2022		2021		2022		2021		2022		2021
Interest income:
Loans receivable	$	15,221	$	10,275	$	28,507	$	21,021	$	16,122	$	10,270	$	44,629	$	31,291
Securities		2,469		2,144		5,066		4,105		2,292		2,378		7,358		6,483
Other interest earning assets		50		16		61		36		125		18		186		54

Total interest income		17,740		12,435		33,634		25,162		18,539		12,666		52,173		37,828

Interest expense:
Deposits		389		549		726		1,200		871		452		1,597		1,652
Repurchase agreements		26		12		42		22		51		13		93		35
Borrowed funds		27		2		33		22		110		1		143		23

Total interest expense		442		563		801		1,244		1,032		466		1,833		1,710

Net interest income		17,298		11,872		32,833		23,918		17,507		12,200		50,340		36,118
Provision for loan losses		0		576		0		1,154		-		139		-		1,293

Net interest income after provision for loan losses		17,298		11,296		32,833		22,764		17,507		12,061		50,340		34,825

Noninterest income:
Fees and service charges		1,560		1,471		2,864		2,537		1,570		1,473		4,434		4,010
Wealth management operations		588		576		1,183		1,183		407		604		1,590		1,787
Gain on sale of loans held-for-sale, net		291		1,116		898		3,165		344		1,229		1,242		4,394
Gain on sale of securities, net		258		269		639		686		23		590		662		1,276
Increase in cash value of bank owned life insurance		193		188		445		357		183		180		628		537
Gain (loss) on sale of foreclosed real estate		0		36		0		27
Gain on sale of foreclosed real estate										-		-		-		27
Other		6		24		11		38		103		70		114		108

Total noninterest income		2,896		3,680		6,040		7,993		2,630		4,146		8,670		12,139

Noninterest expense:
Compensation and benefits		7,538		5,897		14,905		11,582		7,498		6,042		22,403		17,624
Data processing		1,246		597		4,300		1,125		1,212		872		5,512		1,997
Occupancy and equipment		1,729		1,324		3,229		2,696		1,804		1,380		5,033		4,076
Marketing		385		195		1,036		394		587		334		1,623		728
Federal deposit insurance premiums		380		204		599		384		350		236		949		620
Net loss recognized on sale of premises and equipment										254		-		254		-
Other		3,898		2,793		7,376		5,322		3,305		3,537		10,681		8,859

Total noninterest expense		15,176		11,010		31,445		21,503		15,010		12,401		46,455		33,904

Income before income tax expenses		5,018		3,966		7,428		9,254		5,127		3,806		12,555		13,060
Income tax expenses		587		395		862		1,140		571		268		1,433		1,408

Net income	$	4,431	$	3,571	$	6,566	$	8,114	$	4,556	$	3,538	$	11,122	$	11,652

Earnings per common share:
Basic	$	1.04	$	1.03	$	1.60	$	2.33	$	1.07	$	1.02	$	2.68	$	3.35
Diluted	$	1.04	$	1.03	$	1.59	$	2.33	$	1.07	$	1.02	$	2.67	$	3.35

Dividends declared per common share	$	0.31	$	0.31	$	0.62	$	0.62	$	0.31	$	0.31	$	0.93	$	0.93

See accompanying notes to consolidated financial statements.

Finward Bancorp
Consolidated Statements of Comprehensive (Loss) Income
(unaudited)

(Dollars in thousands)	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021			2022			2021			2022			2021

Net income	$	4,431		$	3,571		$	6,566		$	8,114		$	4,556		$	3,538		$	11,122		$	11,652

Net change in net unrealized gains and losses on securities available-for-sale:
Unrealized (loss) gain arising during the period		(30,521	)		5,624			(77,910	)		(2,137	)		(27,900	)		(6,501	)		(105,810	)		(8,638	)
Less: reclassification adjustment for gains included in net income		(258	)		(269	)		(639	)		(686	)		(23	)		(590	)		(662	)		(1,276	)
Net securities (loss) gain during the period		(30,779	)		5,355			(78,549	)		(2,823	)		(27,923	)		(7,091	)		(106,472	)		(9,914	)
Tax effect		6,460			(1,126	)		16,492			591			5,865			1,490			22,357			2,081
Other comprehensive (loss) gain, net of tax		(24,319	)		4,229			(62,057	)		(2,232	)		(22,058	)		(5,601	)		(84,115	)		(7,833	)

Comprehensive (loss) gain, net of tax		(19,888	)		7,800			(55,491	)		5,882			(17,502	)		(2,063	)		(72,993	)		3,819

See accompanying notes to consolidated financial statements.

Finward Bancorp

Consolidated Statements of Changes in Stockholder's Equity

(unaudited)

						Accumulated														Accumulated
			Additional			Other											Additional			Other
	Common		Paid-in			Comprehensive			Retained			Total			Common		Paid-in			Comprehensive			Retained			Total
(Dollars in thousands, except per share data)	Stock		Capital			(Loss)/Income			Earnings			Equity			Stock		Capital			(Loss)/Income			Earnings			Equity


Balance at June 30, 2021															$	-	$	30,141		$	8,209		$	117,219		$	155,569

Net income																-		-			-			3,538			3,538
Other comprehensive loss, net of tax																-		-			(5,601	)		-			(5,601	)
Stock-based compensation expense																-		143			-			-			143
Cash dividends, $0.31 per share																-		-			-			(1,080	)		(1,080	)

Balance at September 30, 2021															$	-	$	30,284		$	2,608		$	119,677		$	152,569

Balance at January 1, 2021	$	0	$	29,987		$	10,441		$	111,261		$	151,689		$	-	$	29,987		$	10,441		$	111,261		$	151,689

Net income		0		0			0			4,543			4,543			-		-			-			11,652			11,652
Other comprehensive loss, net of tax		0		0			(6,461	)		0			(6,461	)		-		-			(7,833	)		-			(7,833	)
Net surrender value of 1,711 restricted stock awards		0		(68	)		0			0			(68	)
Net surrender value of 1,904 restricted stock awards																-		(131	)		-			-			(131	)
Stock-based compensation expense		0		146			0			0			146			-		428			-			-			428
Cash dividends, $0.31 per share		0		0			0			(1,079	)		(1,079	)		-		-			-			(3,236	)		(3,236	)

Balance at March 31, 2021	$	0	$	30,065		$	3,980		$	114,725		$	148,770
Balance at September 30, 2021															$	-	$	30,284		$	2,608		$	119,677		$	152,569


Balance at June 30, 2022															$	-	$	68,623		$	(57,781	)	$	125,812		$	136,654

Net income		0		0			0			3,571			3,571			-		-			-			4,556			4,556
Other comprehensive loss, net of tax		0		0			4,229			0			4,229			-		-			(22,058	)		-			(22,058	)
Net surrender value of 1,404 restricted stock awards		0		(63	)		0			0			(63	)
Stock-based compensation expense		0		139			0			0			139			-		203			-			-			203
Cash dividends, $0.31 per share		0		0			0			(1,077	)		(1,077	)		-		-			-			(1,332	)		(1,332	)

Balance at June 30, 2021	$	0	$	30,141		$	8,209		$	117,219		$	155,569

Balance at September 30, 2022															$	-	$	68,826		$	(79,839	)	$	129,036		$	118,023

Balance at January 1, 2022	$	0	$	30,430		$	4,276		$	121,909		$	156,615		$	-	$	30,430		$	4,276		$	121,909		$	156,615

Net income		0		0			0			2,135			2,135			-		-			-			11,122			11,122
Other comprehensive loss, net of tax		0		0			(37,738	)		0			(37,738	)		-		-			(84,115	)		-			(84,115	)
Net surrender value of 2,336 restricted stock awards		0		(115	)		0			0			(115	)
Net surrender value of 2,479 restricted stock awards																-		(120	)		-			-			(120	)
Stock-based compensation expense		0		169			0			0			169			-		535			-			-			535
Issuance of 795,423 shares at $47.75 per share, for acquisition of Royal Financial, Inc		0		37,902			0			0			37,902			-		37,981			-			-			37,981
Cash dividends, $0.31 per share		0		0			0			(1,331	)		(1,331	)		-		-			-			(3,995	)		(3,995	)

Balance at March 31, 2022	$	0	$	68,386		$	(33,462	)	$	122,713		$	157,637

Net income		0		0			0			4,431			4,431
Other comprehensive loss, net of tax		0		0			(24,319	)		0			(24,319	)
Net surrender value of 113 restricted stock awards		0		(5	)		0			0			(5	)
Stock-based compensation expense		0		163			0			0			163
Other adjustments		0		79			0			0			79
Cash dividends, $0.31 per share		0		0			0			(1,332	)		(1,332	)

Balance at June 30, 2022	$	0	$	68,623		$	(57,781	)	$	125,812		$	136,654
Balance at September 30, 2022															$	-	$	68,826		$	(79,839	)	$	129,036		$	118,023

See accompanying notes to consolidated financial statements.

Finward Bancorp

Consolidated Statements of Cash Flows

(unaudited)

(Dollars in thousands)	Six months ended June 30,						Nine months ended September 30,
	2022			2021			2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,566		$	8,114		$	11,122		$	11,652
Adjustments to reconcile net income to net cash provided by operating activities:
Origination of loans for sale		(29,179	)		(85,903	)		(40,775	)		(120,101	)
Sale of loans originated for sale		33,506			94,163			45,994			131,477
Depreciation and amortization, net of accretion		3,121			2,154			4,695			3,289
Stock based compensation expense		332			285			535			428
Gain on sale of securities, net		(639	)		(686	)		(662	)		(1,276	)
Gain on sale of loans held-for-sale, net		(966	)		(3,293	)		(1,352	)		(4,546	)
Loss on sale of premises and equipment, net								254			-
Gain on sale of foreclosed real estate		0			(27	)		-			(27	)
Gain on cash value of bank owned life insurance		(445	)		(357	)		(628	)		(537	)
Loss on derivatives		68			128			110			152
Provision for loan losses		0			1,154			-			1,293
Net change in:
Interest receivable		388			(90	)		431			(546	)
Other assets		(3,038	)		1,728			(5,043	)		1,591
Accrued expenses and other liabilities		(3,824	)		(3,723	)		(3,045	)		(6,290	)
Net cash provided by operating activities		5,890			13,647			11,636			16,559

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposit in other financial institutions		472			426			474			920
Purchase of certificates of deposit in other financial institutions								(734	)		-
Proceeds from maturities and pay downs of securities available-for-sale		15,596			43,322			37,289			43,488
Proceeds from sales of securities available-for-sale		43,775			19,290			53,953			28,565
Purchase of securities available-for-sale		(11,713	)		(119,075	)		(30,421	)		(191,130	)
Proceeds from bank owned life insurance		314			0			314			-
Net change in loans receivable		(54,178	)		1,660			(82,501	)		20,148
Proceeds of Federal Home Loan Bank Stock		1,512			671			1,512			671
Purchase of loans receivable		(2,663	)		(5,978	)		(2,663	)		(11,331	)
Purchase of premises and equipment, net		(2,081	)		(470	)		(2,656	)		(1,019	)
Proceeds from sale of premises and equipment								1,694			-
Proceeds from sale of foreclosed real estate		0			197			-			484
Cash and cash equivalents from acquisition activity, net		33,799			0			33,799			-
Net cash provided by (used in) investing activities		24,833			(59,957	)		10,060			(109,204	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Change in deposits		7,978			92,757			(76,273	)		103,861
Proceeds from FHLB advances								37,000			-
Repayment of FHLB advances		0			(6,000	)		-			(6,000	)
Net surrender value of restricted stock awards		(120	)		(131	)		(120	)		(131	)
Change in repurchase agreements and other borrowed funds		9,955			10,539
Change in repurchase agreements								7,385			10,133
Change in other borrowed funds								19,174			(149	)
Dividends paid		(2,410	)		(2,152	)		(3,742	)		(3,226	)
Net cash (used in) provided by financing activities		15,403			95,013			(16,576	)		104,488
Net change in cash and cash equivalents		46,126			48,703			5,120			11,843
Cash and cash equivalents at beginning of period		33,176			19,922			33,176			19,922
Cash and cash equivalents at end of period	$	79,302		$	68,625		$	38,296		$	31,765

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	781		$	1,262		$	1,749		$	1,744
Income taxes		1,157			2,020			1,157			2,185
Acquisition activity:
Fair value of assets acquired, including cash and cash equivalents	$	528,321		$	0		$	528,321		$	-
Value of goodwill and other intangible assets		14,726			0			14,726			-
Fair value of liabilities assumed		486,341			0			486,341			-
Cash paid for acquisition		18,725			0			18,725			-
Issuance of common stock for acquisition		37,981			0			37,981			-
Noncash activities:
Dividends declared not paid		1,332			1,077			1,332			1,080
Securities purchased not settled		0			9,764			-			11,187

See accompanying notes to consolidated financial statements.

Finward Bancorp

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 - Basis of Presentation

Organization and Description of Business

The consolidated financial statements include the accounts of Finward Bancorp (the “Bancorp” or “FNWD”), its wholly-owned subsidiaries NWIN Risk Management, Inc. (a captive insurance subsidiary) and Peoples Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, Peoples Service Corporation, NWIN, ~~LLC,~~LLC; NWIN Funding, Incorporated, 1683 Real Estate LLC, and Columbia Development Company, LLC. The Bancorp’s business activities include being a holding company for the Bank as well as a holding company for NWIN Risk Management, Inc. The Bancorp’s earnings are primarily dependent upon the earnings of the Bank. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by U.S. generally accepted accounting principles for complete presentation of consolidated financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets of the Bancorp as of ~~June~~September 30, 2022, and December 31, 2021, and the consolidated statements of income, comprehensive income (loss), and changes in stockholders’ equity for the ~~three~~quarter and ~~six~~nine months ended ~~June~~September 30, 2022, and 2021, and consolidated statements of cash flows for the ~~six~~nine months ended ~~June~~September 30, 2022, and 2021. The income reported for the ~~six~~nine month period ended ~~June~~September 30, 2022, is not necessarily indicative of the results to be expected for the full year.

The Notes to the Consolidated Financial Statements appearing in Finward Bancorp’s Annual Report on Form 10-K (2021 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. The Consolidated Balance Sheet at December 31, 2021, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on net income.

Note 2 - Use of Estimates

Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of foreclosed real estate, loan servicing rights, investment securities, deferred tax assets, goodwill, and the status of contingencies are particularly susceptible to material change in the near term.

Note 3 - Acquisition Activity

On January 31, 2022, Finward Bancorp (“Finward”) completed its previously announced acquisition of Royal Financial, Inc., a Delaware corporation (“RYFL”), pursuant to an Agreement and Plan of Merger dated July 28, 2021 (the “Merger Agreement”) between Finward and RYFL. The stockholders of both Finward and RYFL approved the Merger Agreement at the respective stockholder meetings of the companies held on December 13, 2021. Pursuant to the Merger Agreement, RYFL merged with and into Finward, with Finward as the surviving corporation (the “Merger”), and Royal Savings Bank, an Illinois state-chartered savings bank and wholly-owned subsidiary of RYFL, merged with and into Peoples Bank, the wholly-owned Indiana state-chartered commercial bank subsidiary of Finward, with Peoples Bank as the surviving bank.

Under the terms of the merger agreement, RYFL stockholders who owned 101 or more shares of RYFL common stock were permitted to elect to receive either 0.4609 shares of Finward common stock or $20.14 in cash, or a combination of both, for each share of RYFL common stock owned, subject to proration and allocation provisions such that 65% of the shares of RYFL common stock outstanding immediately prior to the closing of the merger were converted into the right to receive shares of Finward common stock and the remaining 35% of the outstanding RYFL shares were converted into the right to receive cash. Stockholders holding less than 101 shares of RYFL common stock received fixed consideration of $20.14 in cash per share and no stock consideration.

As a result of RYFL stockholder stock and cash elections and the related allocation and proration provisions of the merger agreement, Finward issued 795,423 shares of its common stock and paid cash consideration of approximately $18.7 million in the Merger. Based on the January 28, 2022, closing price of $47.75 per share of Finward common stock, the transaction had an implied valuation of approximately $56.7 million. In connection with the acquisition, Robert W. Youman, was appointed to the boards of directors of Finward and Peoples Bank effective as of the closing of the Merger. RYFL had a home office and eight branch offices in Cook County and DuPage County, Illinois. The acquisition has further expanded the Bank’s banking center network in Cook County and DuPage County, Illinois.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on the valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the RYFL acquisition is allocated as follows:

ASSETS			*LIABILITIES*					*LIABILITIES*
Cash and due from banks	$	52,524	Deposits			$	52,524	Deposits
Investment securities, available for sale		0	Non-interest bearing	$	32,095		-	Non-interest bearing	$	32,095
Certificate of deposit in other financial institutions		245	NOW accounts		63,639		245	NOW accounts		63,639
			Savings and money market		184,149			Savings and money market		184,149
Total Loans		450,757	Certificates of deposits		195,153		450,757	Certificates of deposits		195,153
			Total Deposits		475,036			Total Deposits		475,036
Premises and equipment, net		13,896					13,896
FHLB stock		1,303	Interest payable		75		1,303	Interest payable		75
Goodwill		11,506	Other liabilities		11,228		11,506	Other liabilities		11,228
Core deposit intangible		3,220					3,220
Interest receivable		1,836					1,836
Other assets		7,758					7,758
Total assets purchased	$	543,045				$	543,045
Common shares issued		37,981					37,981
Cash paid		18,725					18,725
Total purchase price	$	56,706	Total liabilities assumed	$	486,339	$	56,706	Total liabilities assumed	$	486,339

During the second quarter of 2022, an adjustment was made to the carrying value of other assets of $189 thousand, due to the valuation of prepaids brought over in the acquisition, and premises and equipment, net, of $48 thousand, due to a correction in the valuation of buildings, in addition, a correction was made to the valuation of shares issued increasing the value by $79 thousand. The resulting impact of these changes was a decrease to the goodwill balance related to the RYFL acquisition of $158 thousand.

Final estimates of fair value on the date of acquisition have not been finalized yet. Prior to the end of the one-year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods as if the adjustments to the provisional amounts had been recognized as of the acquisition date.

Goodwill of approximately $11.5 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, is expected to be recorded in the RYFL acquisition and is the result of expected operational synergies and other factors. This goodwill is not expected to be deductible for tax purposes. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the RYFL acquisition will change.

Gross loans acquired during the RYFL transaction totaled $456.7 million. As of the ~~six~~nine months ended ~~June~~September 30, 2022, the remaining outstanding principal of loans directly related to the RYFL acquisition total ~~$425.8~~$389.5 million, of which ~~$8.1~~$5.6 million are expected to be uncollectable.

The following pro-forma and earnings (unaudited) of the combined company are presented as if the RYFL merger had occurred on January 1, 2022 and January 1, 2021:

	For the three months ended			For the three months ended			For the six months ended			For the six months ended			For the three months ended			For the three months ended			For the nine months ended			For the nine months ended
(in thousands)	*June 30, 2022*			*June 30, 2021*			*June 30, 2022*			*June 30, 2021*			*September 30, 2022*			*September 30, 2021*			*September 30, 2022*			*September 30, 2021*
Selected Financial Data
Interest income	$	17,740		$	17,263		$	35,329		$	34,654		$	18,539		$	17,939		$	53,868		$	52,593
Interest expense		(442	)		(998	)		(902	)		(2,189	)		(1,032	)		(838	)		(1,934	)		(3,027	)
Recovery of (provision for) loan losses		0			(816	)		0			(1,094	)		-			(14	)		-			(1,108	)
Non-interest income		2,896			3,902			6,179			8,418			2,630			4,376			8,809			12,794
Non-interest expense (1)		(15,176	)		(13,831	)		(29,573	)		(26,776	)		(15,010	)		(15,559	)		(44,583	)		(42,335	)
Income before provision for income taxes		5,018			5,520			11,033			13,013			5,127			5,904			16,160			18,917
Income tax expense		(587	)		(639	)		(1,619	)		(1,812	)		(571	)		(866	)		(2,190	)		(2,678	)
Net income	$	4,431		$	4,881		$	9,414		$	11,201		$	4,556		$	5,038		$	13,970		$	16,239

Earnings per common share:
Basic	$	1.04		$	1.40		$	2.29		$	3.22		$	1.07		$	1.45		$	3.36		$	4.67
Diluted	$	1.04		$	1.40		$	2.28		$	3.22		$	1.07		$	1.45		$	3.35		$	4.67

(1)

Excludes $2.9 million in pre-tax merger expenses for the ~~six~~nine months ended ~~June~~September 30, 2022.

For the ~~six~~nine months ended ~~June~~September 30, 2022, the Bancorp has recorded $2.9 million in pre-tax one-time merger expenses related to the RYFL acquisition, and these expenses have been allocated to the following non-interest expense line items within the income statement:

(in thousands)	Six months ended		Nine months ended
Noninterest expense:	June 30, 2022		September 30, 2022
Compensation and benefits	$	132	$	132
Data processing		1,929		1,929
Marketing		135		135
Other		656		656

Period merger expense	$	2,852	$	2,852

Note 4 - Securities

The estimated fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

	(Dollars in thousands)									(Dollars in thousands)
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Cost		Unrealized		Unrealized			Fair		Cost		Unrealized		Unrealized			Fair
	Basis		Gains		Losses			Value		Basis		Gains		Losses			Value
June 30, 2022
September 30, 2022
U.S. government sponsored entities	$	8,883	$	0	$	(949	)	$	7,934	$	8,883	$	-	$	(1,338	)	$	7,545
U.S. treasury securities		594		0		0			594		394		-		-			394
Collateralized mortgage obligations and residential mortgage-backed securities		171,286		2		(21,227	)		150,061		166,651		-		(29,370	)		137,281
Municipal securities		290,675		20		(49,848	)		240,847		282,002		-		(69,214	)		212,788
Collateralized debt obligations		2,173		0		(1,143	)		1,030		2,173		-		(1,146	)		1,027
Total securities available-for-sale	$	473,611	$	22	$	(73,167	)	$	400,466	$	460,103	$	-	$	(101,068	)	$	359,035

	(Dollars in thousands)									(Dollars in thousands)
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Cost		Unrealized		Unrealized			Fair		Cost		Unrealized		Unrealized			Fair
	Basis		Gains		Losses			Value		Basis		Gains		Losses			Value
December 31, 2021
U.S. government sponsored entities	$	8,883	$	0	$	(214	)	$	8,669	$	8,883	$	-	$	(214	)	$	8,669
U.S. treasury securities		400		0		0			400		400		-		-			400
Collateralized mortgage obligations and residential mortgage-backed securities		187,279		961		(3,539	)		184,701		187,279		961		(3,539	)		184,701
Municipal securities		322,750		9,904		(527	)		332,127		322,750		9,904		(527	)		332,127
Collateralized debt obligations		2,173		0		(1,181	)		992		2,173		-		(1,181	)		992
Total securities available-for-sale	$	521,485	$	10,865	$	(5,461	)	$	526,889	$	521,485	$	10,865	$	(5,461	)	$	526,889

The cost basis and estimated fair value of available-for-sale debt securities at ~~June~~September 30, 2022, by contractual maturity, were as follows. Securities not due at a single maturity date, primarily collateralized mortgage obligations and residential mortgage-backed securities, are shown separately.

	(Dollars in thousands)				(Dollars in thousands)
	Available-for-sale				Available-for-sale
			Estimated				Estimated
	Cost		Fair		Cost		Fair
June 30, 2022	Basis		Value
September 30, 2022					Basis		Value
Due in one year or less	$	494	$	495	$	190	$	190
Due from one to five years		1,954		1,956		1,978		1,972
Due from five to ten years		26,832		24,869		21,124		18,207
Due over ten years		273,045		223,085		270,160		201,385

Collateralized mortgage obligations and residential mortgage-backed securities		171,286		150,061		166,651		137,281
Total	$	473,611	$	400,466	$	460,103	$	359,035

Sales of available-for-sale securities were as follows for the quarter ended:

	(Dollars in thousands)
	September 30,			September 30,
	2022			2021

Proceeds	$	10,178		$	9,275
Gross gains		41			591
Gross losses		(18	)		(1	)

Sales of available-for-sale securities were as follows for the ~~three~~nine months ended:

	(Dollars in thousands)						(Dollars in thousands)
	June 30,			June 30,			September 30,			September 30,
	2022			2021			2022			2021

Proceeds	$	27,539		$	12,386		$	53,953		$	28,565
Gross gains		295			289			733			1,297
Gross losses		(37	)		(20	)		(71	)		(21	)

~~Sales of available-for-sale securities were as follows for the~~ ~~six~~ ~~months ended:~~

(Dollars in thousands)

June 30,

June 30,

2022

2021

Proceeds
$ 43,775 $ 19,290
Gross gains
692 706
Gross losses
(53 ) (20 )

Accumulated other comprehensive income/(loss) balances, net of tax, related to available-for-sale securities, were as follows:

	(Dollars in thousands)			(Dollars in thousands)
	Unrealized gain/(loss)			Unrealized gain/(loss)
Ending balance, December 31, 2021	$	4,276
Ending balance, June 30, 2022				$	(57,781	)
Current period change		(62,057	)		(22,058	)
Ending balance, June 30, 2022	$	(57,781	)
Ending balance, September 30, 2022				$	(79,839	)

	(Dollars in thousands)
	Unrealized gain/(loss)
Ending balance, June 30, 2021	$	8,209
Current period change		(5,601	)
Ending balance, September 30, 2021	$	2,608

	(Dollars in thousands)
	Unrealized gain/(loss)
Ending balance, December 31, 2021	$	4,276
Current period change		(84,115	)
Ending balance, September 30, 2022	$	(79,839	)

	(Dollars in thousands)
	Unrealized gain/(loss)
Ending balance, December 31, 2020	$	10,441
Current period change		(7,833	)
Ending balance, September 30, 2021	$	2,608

Securities with market values of approximately ~~$236.7~~$208.9 million and $39.5 million were pledged as of ~~June~~September 30, 2022 and December 31, 2021, respectively, as collateral for repurchase agreements, public funds, and for other purposes as permitted or required by law.

Securities with gross unrealized losses at ~~June~~September 30, 2022, and December 31, 2021 not recognized in income are as follows:

	(Dollars in thousands)																		(Dollars in thousands)
	Less than 12 months					12 months or longer					Total								Less than 12 months					12 months or longer					Total
	Estimated					Estimated					Estimated					Percentage of			Estimated					Estimated					Estimated					Percentage of
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Total Portfolio			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Total Portfolio
	Value		Losses			Value		Losses			Value		Losses			in Loss Position			Value		Losses			Value		Losses			Value		Losses			in Loss Position
June 30, 2022
September 30, 2022
U.S. government sponsored entities	$	0	$	0		$	7,934	$	(949	)	$	7,934	$	(949	)		100.0	%	$	-	$	-		$	7,545	$	(1,338	)	$	7,545	$	(1,338	)		100.0	%
Collateralized mortgage obligations and residential mortgage-backed securities		91,051		(11,037	)		58,348		(10,190	)		149,399		(21,227	)		99.6	%		45,306		(7,593	)		91,975		(21,777	)		137,281		(29,370	)		100.0	%
Municipal securities		230,567		(48,029	)		6,170		(1,819	)		236,737		(49,848	)		98.3	%		166,907		(49,241	)		45,611		(19,973	)		212,518		(69,214	)		99.9	%
Collateralized debt obligations		0		0			1,030		(1,143	)		1,030		(1,143	)		100.0	%		-		-			1,027		(1,146	)		1,027		(1,146	)		100.0	%
Total temporarily impaired	$	321,618	$	(59,066	)	$	73,482	$	(14,101	)	$	395,100	$	(73,167	)		98.7	%	$	212,213	$	(56,834	)	$	146,159	$	(44,233	)	$	358,371	$	(101,068	)		99.8	%
Number of securities				415					41					456								333					120					453

	(Dollars in thousands)																		(Dollars in thousands)
	Less than 12 months					12 months or longer					Total								Less than 12 months					12 months or longer					Total
	Estimated					Estimated					Estimated					Percentage of			Estimated					Estimated					Estimated					Percentage of
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Total Portfolio			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Total Portfolio
	Value		Losses			Value		Losses			Value		Losses			in Loss Position			Value		Losses			Value		Losses			Value		Losses			in Loss Position
December 31, 2021
U.S. government sponsored entities	$	8,669	$	(214	)	$	0	$	0		$	8,669	$	(214	)		100.0	%	$	8,669	$	(214	)	$	-	$	-		$	8,669	$	(214	)		100.0	%
Collateralized mortgage obligations and residential mortgage-backed securities		126,373		(3,175	)		8,109		(364	)		134,482		(3,539	)		72.8	%		126,373		(3,175	)		8,109		(364	)		134,482		(3,539	)		72.8	%
Municipal securities		70,309		(527	)		0		0			70,309		(527	)		21.2	%		70,309		(527	)		-		-			70,309		(527	)		21.2	%
Collateralized debt obligations		0		0			992		(1,181	)		992		(1,181	)		100.0	%		-		-			992		(1,181	)		992		(1,181	)		100.0	%
Total temporarily impaired	$	205,351	$	(3,916	)	$	9,101	$	(1,545	)	$	214,452	$	(5,461	)		40.7	%	$	205,351	$	(3,916	)	$	9,101	$	(1,545	)	$	214,452	$	(5,461	)		40.7	%
Number of securities				133					5					138								133					5					138

Unrealized losses on securities have not been recognized into income because the securities are of high credit quality or have undisrupted cash flows. Management has the intent and ability to hold those securities for the foreseeable future, and the decline in fair value is largely due to changes in interest rates and volatility in securities markets. The fair values are expected to recover as the securities approach maturity.

Note 5 - Loans Receivable

The Bancorp’s current lending programs are described below:

Residential Real Estate. The primary lending activity of the Bancorp has been the granting of conventional mortgage loans to enable borrowers to purchase existing homes, refinance existing homes, or construct new homes. Conventional loans are made up to a maximum of 97% of the purchase price or appraised value, whichever is less. For loans made in excess of 80% of value, private mortgage insurance is generally required in an amount sufficient to reduce the Bancorp’s exposure to 80% or less of the appraised value of the property. Loans insured by private mortgage insurance companies can be made for up to 97% of value. Loans closed with over 20% of equity do not require private mortgage insurance because of the borrower’s level of equity investment.

Fixed rate loans currently originated generally conform to Freddie Mac guidelines for loans purchased under the one‑to‑four family program. Loan interest rates are determined based on secondary market yield requirements and local market conditions. Fixed rate mortgage loans with contractual maturities generally exceeding fifteen years and greater may be sold and/or classified as held for sale to control exposure to interest rate risk.

The 15 year mortgage loan program has gained wide acceptance in the Bancorp’s primary market area. As a result of the shortened maturity of these loans, this product has been priced below the comparable 20 and 30 year loan offerings. Mortgage applicants for 15 year loans tend to have a larger than normal down payment; this, coupled with the larger principal and interest payment amount, has caused the 15 year mortgage loan portfolio to consist, to a significant extent, of second time home buyers whose underwriting qualifications tend to be above average.

The Bancorp’s Adjustable Rate Mortgage Loans (“ARMs”) include offerings that reprice annually or are ~~“Mini-Fixed.~~“mini-fixed.” The ~~“Mini‑Fixed”~~“mini‑fixed” mortgage reprices annually after a one, three, five, seven or ten year period. The ability of the Bancorp to successfully market ARM’s depends upon loan demand, prevailing interest rates, volatility of interest rates, public acceptance of such loans and terms offered by competitors.

Home Equity Line of Credit. The Bancorp offers a fixed and variable rate revolving line of credit secured by the equity in the borrower’s home. Both products offer an interest only option where the borrower pays interest only on the outstanding balance each month. Equity lines will typically require a second mortgage appraisal and a second mortgage lender’s title insurance policy. Loans are generally made up to a maximum of 89% of the appraised value of the property less any outstanding liens.

Fixed term home improvement and equity loans are made up to a maximum of 85% of the appraised value of the improved property, less any outstanding liens. These loans are offered on both a fixed and variable rate basis with a maximum term of 240 months. All home equity loans are made on a direct basis to borrowers.

Commercial Real Estate and Multifamily Loans. Commercial real estate loans are typically made to a maximum of 80% of the appraised value. Such loans are generally made on an adjustable rate basis. These loans are typically made for terms of 15 to 20 years. Loans with an amortizing term exceeding 15 years normally have a balloon feature calling for a full repayment within seven to ten years from the date of the loan. The balloon feature affords the Bancorp the opportunity to restructure the loan if economic conditions so warrant. Commercial real estate loans include loans secured by commercial rental units, apartments, condominium developments, small shopping centers, owner occupied commercial/industrial properties, hospitality units and other retail and commercial developments.

While commercial real estate lending is generally considered to involve a higher degree of risk than single‑family residential lending due to the concentration of principal in a limited number of loans and the effects of general economic conditions on real estate developers and managers, the Bancorp has endeavored to reduce this risk in several ways. In originating commercial real estate loans, the Bancorp considers the feasibility of the project, the financial strength of the borrowers and lessees, the managerial ability of the borrowers, the location of the project and the economic environment. Management evaluates the debt coverage ratio and analyzes the reliability of cash flows, as well as the quality of earnings. All such loans are made in accordance with well-defined underwriting standards and are generally supported by personal guarantees, which represent a secondary source of repayment.

Loans for the construction of commercial properties are generally located within an area permitting physical inspection and regular review of business records. Projects financed outside of the Bancorp’s primary lending area generally involve borrowers and guarantors who are or were previous customers of the Bancorp or projects that are underwritten according to the Bank’s underwriting standards.

Construction and Land Development. Construction loans on residential properties are made primarily to individuals and contractors who are under contract with individual purchasers. These loans are personally guaranteed by the borrower. The maximum loan-to-value ratio is 89% of either the current appraised value or the cost of construction, whichever is less. Residential construction loans are typically made for periods of six months to one year.

Loans are also made for the construction of commercial properties. All such loans are made in accordance with well-defined underwriting standards. Generally if the loans are not owner occupied, these types of loans require proof of intent to lease and a confirmed end-loan takeout. In general, loans made do not exceed 80% of the appraised value of the property. Commercial construction loans are typically made for periods not to exceed two years or date of occupancy, whichever is less.

Commercial Business and Farmland Loans. Although the Bancorp’s priority in extending various types of commercial business loans changes from time to time, the basic considerations in determining the makeup of the commercial business loan portfolio are economic factors, regulatory requirements and money market conditions. The Bancorp seeks commercial loan relationships from the local business community and from its present customers. Conservative lending policies based upon sound credit analysis governs the extension of commercial credit. The following loans, although not inclusive, are considered preferable for the Bancorp’s commercial loan portfolio: loans collateralized by liquid assets; loans secured by general use machinery and equipment; secured short‑term working capital loans to established businesses secured by business assets; short‑term loans with established sources of repayment and secured by sufficient equity and real estate; and unsecured loans to customers whose character and capacity to repay are firmly established.

Consumer Loans. The Bancorp offers consumer loans to individuals for personal, household or family purposes. Consumer loans are either secured by adequate collateral, or unsecured. Unsecured loans are based on the strength of the applicant’s financial condition. All borrowers must meet current underwriting standards. The consumer loan program includes both fixed and variable rate products.

Manufactured Homes. The Bancorp purchases fixed rate closed loans from a third party that are subject to Bancorp’s underwriting requirements and secured by manufactured homes. The maturity date on these loans can range up to 25 years. In addition, these loans are partially secured by a reserve account held at the Bancorp.

Government Loans. The Bancorp is permitted to purchase non-rated municipal securities, tax anticipation notes and warrants within the local market area.

~~Loans receivable are summarized below:~~

(Dollars in thousands)
	June 30, 2022			December 31, 2021			September 30, 2022		December 31, 2021
Loans secured by real estate:
Residential real estate	$	459,151		$	260,134		$	471,565	$	260,134
Home equity		35,672			34,612			37,578		34,612
Commercial real estate		420,735			317,145			452,852		317,145
Construction and land development		153,422			123,822			134,301		123,822
Multifamily		248,495			61,194			258,377		61,194
Total loans secured by real estate		1,317,475			796,907			1,354,673		796,907
Commercial business		103,649			115,772			95,372		115,772
Consumer		1,673			582			827		582
Manufactured homes		37,693			37,887			35,866		37,887
Government		8,081			8,991			9,649		8,991
Loans receivable		1,468,571			960,139			1,496,387		960,139
Add (less):
Net deferred loan origination costs		6,482			6,810			5,767		6,810
Undisbursed loan funds		(672	)		(229	)
Loans receivable, net of deferred fees and costs..	$	1,474,381		$	966,720
Undisbursed loan funds and loan clearings								542		(229	)
Loans receivable, net of deferred fees and costs							$	1,502,696	$	966,720

(Dollars in thousands)

Beginning Balance

Charge-offs

Recoveries

Provisions

Ending Balance

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended June 30, 2022:

Allowance for loan losses:

Residential real estate
$ 2,493 $ - $ 29 $ 234 $ 2,756
Home equity
354 - - 19 373
Commercial real estate
5,530 - - (3 ) 5,527
Construction and land development
2,135 - - (391 ) 1,744
Multifamily
889 - - 239 1,128
Commercial business
1,941 - 7 (140 ) 1,808
Consumer
45 (27 ) 10 42 70
Manufactured homes
- - - - 0
Government
- - - - 0
Total
$ 13,387 $ (27 ) $ 46 $ - $ 13,406

(Dollars in thousands)

Beginning Balance

Charge-offs

Recoveries

Provisions

Ending Balance

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the three months ended ~~June~~September 30, ~~2021:~~2022:

Allowance for loan losses:
Residential real estate	$	2,176	$	0		$	15	$	103		$	2,294	$	2,756	$	-		$	8	$	246		$	3,010
Home equity		309		0			-		62			371		373		-			-		22			395
Commercial real estate		5,726		-			-		213			5,939		5,527		-			-		(27	)		5,500
Construction and land development		1,587		-			-		211			1,798		1,744		-			-		(229	)		1,515
Multifamily		680		-			-		60			740		1,128		-			-		108			1,236
Commercial business		2,552		-			11		(89	)		2,474		1,808		(57	)		50		(100	)		1,701
Consumer		17		(11	)		1		16			23		70		(13	)		4		(20	)		41
Manufactured homes		-		-			-		-			-		-		-			-		-			-
Government		-		-			-		-			-		-		-			-		-			-
Total	$	13,047	$	(11	)	$	27	$	576		$	13,639	$	13,406	$	(70	)	$	62	$	-		$	13,398

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the ~~six~~three months ended ~~June~~September 30, ~~2022:~~2021:

Allowance for loan losses:
Residential real estate	$	2,480	$	-		$	50	$	226		$	2,756	$	2,294	$	(28	)	$	21	$	188		$	2,475
Home equity		357		-			-		16			373		371		-			-		3			374
Commercial real estate		5,515		-			-		12			5,527		5,939		-			-		413			6,352
Construction and land development		2,119		-			-		(375	)		1,744		1,798		-			-		90			1,888
Multifamily		848		-			-		280			1,128		740		-			-		47			787
Commercial business		2,009		-			38		(239	)		1,808		2,474		-			6		(594	)		1,886
Consumer		15		(37	)		12		80			70		23		(4	)		1		(8	)		12
Manufactured homes		-		-			-		-			0		-		-			-		-			-
Government		-		-			-		-			0		-		-			-		-			-
Total	$	13,343	$	(37	)	$	100	$	-		$	13,406	$	13,639	$	(32	)	$	28	$	139		$	13,774

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the ~~six~~nine months ended ~~June~~September 30, 2022:

Allowance for loan losses:
Residential real estate	$	2,480	$	-		$	58	$	472		$	3,010
Home equity		357		-			-		38			395
Commercial real estate		5,515		-			-		(15	)		5,500
Construction and land development		2,119		-			-		(604	)		1,515
Multifamily		848		-			-		388			1,236
Commercial business		2,009		(57	)		88		(339	)		1,701
Consumer		15		(50	)		16		60			41
Manufactured homes		-		-			-		-			-
Government		-		-			-		-			-
Total	$	13,343	$	(107	)	$	162	$	-		$	13,398

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the nine months ended September 30, 2021:

Allowance for loan losses:
Residential real estate	$	2,211	$	(4	)	$	25	$	62		$	2,294	$	2,211	$	(32	)	$	46	$	250		$	2,475
Home equity		276		(1	)		-		96			371		276		(1	)		-		99			374
Commercial real estate		5,406		-			-		533			5,939		5,406		-			-		946			6,352
Construction and land development		1,405		-			-		393			1,798		1,405		-			-		483			1,888
Multifamily		626		-			-		114			740		626		-			-		161			787
Commercial business		2,508		-			19		(53	)		2,474		2,508		-			25		(647	)		1,886
Consumer		26		(17	)		5		9			23		26		(21	)		6		1			12
Manufactured homes		-		-			-		-			-		-		-			-		-			-
Government		-		-			-		-			-		-		-			-		-			-
Total	$	12,458	$	(22	)	$	49	$	1,154		$	13,639	$	12,458	$	(54	)	$	77	$	1,293		$	13,774

A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased. This reserve is available for use for manufactured home loan nonperformance and costs associated with nonperformance. If the segment performs in line with expectations, the deferred cost reserve is paid as a premium to the third party originator of the loan. The unamortized balance of the deferred cost reserve totaled ~~$5.3~~$5.0 million and $5.8 million as of ~~June~~September 30, 2022, and December 31, 2021, respectively, and is included in net deferred loan origination costs.

The Bancorp's impairment analysis is summarized below:

Ending Balances

(Dollars in thousands)

Individually
evaluated for
impairment
reserves

Collectively
evaluated for
impairment
reserves

Loan receivables

Individually
evaluated for
impairment

Purchased credit
impaired
individually
evaluated for
impairment

Collectively
evaluated for
impairment

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at June 30, 2022:

Residential real estate
$ 31 $ 2,725 $ 459,151 $ 290 $ 2,057 $ 456,804
Home equity
3 370 35,672 21 133 35,518
Commercial real estate
446 5,081 420,735 846 2,970 416,919
Construction and land development
- 1,744 153,422 - 800 152,622
Multifamily
- 1,128 248,495 - 2,940 245,555
Commercial business
251 1,557 103,649 306 1,024 102,319
Consumer
- 70 1,673 - 20 1,653
Manufactured homes
- - 37,693 - - 37,693
Government
- - 8,081 - - 8,081
Total
$ 731 $ 12,675 $ 1,468,571 $ 1,463 $ 9,944 $ 1,457,164

Ending Balances

(Dollars in thousands)

Individually

evaluated for

impairment

reserves

Collectively

evaluated for

impairment

reserves

Loan receivables

Individually

evaluated for

impairment

Purchased credit

impaired

individually

evaluated for

impairment

Collectively

evaluated for

impairment

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at September 30, 2022:

Residential real estate	$	27	$	2,983	$	471,565	$	1,545	$	1,778	$	468,242
Home equity		3		392		37,578		116		127		37,335
Commercial real estate		456		5,044		452,852		2,264		2,965		447,623
Construction and land development		-		1,515		134,301		-		-		134,301
Multifamily		-		1,236		258,377		-		2,804		255,573
Commercial business		263		1,438		95,372		397		991		93,984
Consumer		-		41		827		-		19		808
Manufactured homes		-		-		35,866		-		-		35,866
Government		-		-		9,649		-		-		9,649
Total	$	749	$	12,649	$	1,496,387	$	4,322	$	8,684	$	1,483,381

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2021:

Residential real estate	$	17	$	2,463	$	260,134	$	755	$	1,016	$	258,363
Home equity		4		353		34,612		147		137		34,328
Commercial real estate		386		5,129		317,145		1,600		-		315,545
Construction and land development		-		2,119		123,822		-		-		123,822
Multifamily		-		848		61,194		-		556		60,638
Commercial business		277		1,732		115,772		524		1,073		114,175
Consumer		-		15		582		-		-		582
Manufactured homes		-		-		37,887		-		-		37,887
Government		-		-		8,991		-		-		8,991
Total	$	684	$	12,659	$	960,139	$	3,026	$	2,782	$	954,331

The Bancorp's credit quality indicators are summarized below at ~~June~~September 30, 2022 and December 31, 2021:

	Credit Exposure - Credit Risk Portfolio By Creditworthiness Category								Credit Exposure - Credit Risk Portfolio By Creditworthiness Category
	June 30, 2022								September 30, 2022
(Dollars in thousands)	1-6		7		8				1-6		7		8

Loan Segment	Pass		Special mention		Substandard		Total		Pass		Special mention		Substandard		Total
Residential real estate	$	451,077	$	2,055	$	6,019	$	459,151	$	464,241	$	1,297	$	6,027	$	471,565
Home equity		34,648		400		624		35,672		36,589		391		598		37,578
Commercial real estate		403,000		10,890		6,845		420,735		432,797		11,754		8,301		452,852
Construction and land development		152,622		800		0		153,422		132,129		2,172		-		134,301
Multifamily		244,053		1,541		2,901		248,495		253,001		2,608		2,768		258,377
Commercial business		100,313		3,057		279		103,649		92,213		2,931		228		95,372
Consumer		1,673		0		0		1,673		827		-		-		827
Manufactured homes		37,693		0		0		37,693		35,866		-		-		35,866
Government		8,081		0		0		8,081		9,649		-		-		9,649
Total	$	1,433,160	$	18,743	$	16,668	$	1,468,571	$	1,457,312	$	21,153	$	17,922	$	1,496,387

	December 31, 2021								December 31, 2021
(Dollars in thousands)	1-6		7		8				1-6		7		8

Loan Segment	Pass		Special mention		Substandard		Total		Pass		Special mention		Substandard		Total
Residential real estate	$	253,472	$	2,940	$	3,722	$	260,134	$	253,472	$	2,940	$	3,722	$	260,134
Home equity		33,565		415		632		34,612		33,565		415		632		34,612
Commercial real estate		301,572		12,011		3,562		317,145		301,572		12,011		3,562		317,145
Construction and land development		120,192		3,630		0		123,822		120,192		3,630		-		123,822
Multifamily		60,657		153		384		61,194		60,657		153		384		61,194
Commercial business		113,470		1,915		387		115,772		113,470		1,915		387		115,772
Consumer		582		0		0		582		582		-		-		582
Manufactured homes		37,828		59		0		37,887		37,828		59		-		37,887
Government		8,991		0		0		8,991		8,991		-		-		8,991
Total	$	930,329	$	21,123	$	8,687	$	960,139	$	930,329	$	21,123	$	8,687	$	960,139

The Bancorp has established a standard loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio. The use and application of these grades by the Bancorp is uniform and conforms to regulatory definitions. The loan grading system is as follows:

1 – Superior Quality

Loans in this category are substantially risk free. Loans fully collateralized by a Bank certificate of deposit or Bank deposits with a hold are substantially risk free.

2 – Excellent Quality

The borrower generates excellent and consistent cash flow for debt coverage, excellent average credit scores, excellent liquidity and net worth and are reputable operators with over 15 years experience. Current and debt to tangible net worth ratios are excellent. Loan to value is substantially below policy and collateral condition is excellent.

3 – Great Quality

The borrower generates more than sufficient cash flow to fund debt service and cash flow is improving. Average credit scores are very strong. Operators are reputable with significant years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are very strong. Loan to value is significantly below policy and collateral condition is significantly above average.

4 – Above Average Quality

The borrower generates more than sufficient cash flow to fund debt service but cash flow trends may be stable or slightly declining. Average credit scores are strong. The borrower is a reputable operator with many years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are strong. Loan to value is below policy and collateral condition is above average.

5 – Average Quality

Borrowers are considered creditworthy and can repay the debt in the normal course of business, however, cash flow trends may be inconsistent or fluctuating. Average credit scores are satisfactory and years of experience is acceptable. Liquidity and net worth are satisfactory. Current and debt to tangible net worth ratios are average. Loan to value is slightly below policy and the collateral condition is slightly above average.

6 – Pass

Borrowers are considered credit worthy but financial condition may show signs of weakness due to internal or external factors. Cash flow trends may be declining annually. Average credit scores may be low but remain acceptable. Borrower has limited years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are below average. Loan to value is nearing policy limits and collateral condition is average.

7 – Special Mention

A special mention asset has identified weaknesses that deserve Management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. There is still adequate protection by the current sound worth and paying capacity of the obligor or of the collateral pledged. The Special Mention rating is viewed as transitional and will be monitored closely.

Loans in this category may exhibit some of the following risk factors. Cash flow trends may be consistently declining or may be questionable. Debt coverage ratios may be at or near 1:1. Average credit scores may be very weak or the borrower may have minimal years of experience. Liquidity, net worth, current and debt to tangible net worth ratios may be very weak. Loan to value may be at policy limits or may exceed policy limits. Collateral condition may be below average.

8 – Substandard

This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit, some loss could be incurred in collection if the deficiencies are not corrected.

9 – Doubtful

Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.

10 – Loss

Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.

Performing loans are loans that are paying as agreed and are approximately less than ninety days past due on payments of interest and principal.

During the ~~six~~nine months ending ~~June~~September 30, 2022, ~~ten~~nine residential real estate loans totaling ~~$974 thousand~~$1.5 million, one commercial real estate loan totaling 1.4 million, and one home equity loan totaling $7$5 thousand, were modified to include deferral of principal resulting in troubled debt restructuring classification. No trouble debt restructuring loans had subsequently defaulted during the ~~six~~nine months ending ~~June~~September 30, 2022. During the ~~six~~nine months ending ~~June~~September 30, 2021, two residential real estate loans to one customer totaling ~~$150~~$148 thousand were modified to ~~included~~include deferral of principal and ~~one~~interest resulting in troubled debt restructuring classification. One commercial real estate loan totaling $835 thousand was restructured with a reduced interest rate and extended amortization resulting in troubled debt restructuring ~~classifications.~~classification. ~~Two~~One commercial business loan totaling $601 thousand was provided a short-term renewal and a pending long term restructure resulting in troubled debt restructuring classification. One residential real estate trouble debt restructuring ~~loans~~loan totaling ~~$73~~$37 thousand had subsequently defaulted during the ~~six~~nine months ending ~~June~~September 30, 2021. All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

The Bancorp’s individually evaluated impaired loans are summarized below.

(Dollars in thousands)							For the six months ended				For the three months ended										For the nine months ended				For the three months ended
(unaudited)	As of June 30, 2022						June 30, 2022				June 30, 2022				As of September 30, 2022						September 30, 2022				September 30, 2022
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	2,057	$	4,844	$	-	$	2,438	$	155	$	2,816	$	125	$	3,069	$	4,559	$	-	$	2,596	$	206	$	2,563	$	51
Home equity		133		253		-		214		13		191		6		222		238		-		216		14		178		1
Commercial real estate		2,970		3,236		-		2,448		220		3,290		210		4,384		4,572		-		2,932		196		3,677		(24	)
Construction and land development		800		1,023		-		573		0		860		0		-		-		-		430		13		400		13
Multifamily		2,940		3,269		-		2,337		62		3,228		62		2,804		3,253		-		2,454		86		2,872		24
Commercial business		1,024		1,024		-		1,159		76		1,136		61		1,072		1,181		-		1,137		79		1,048		3
Consumer		20		20		-		14		0		21		0		19		19		-		15		1		20		1
Manufactured homes		0		0		-		0		0		0		0		-		-		-		-		-		-		-
Government		0		0		-		0		0		0		0		-		-		-		-		-		-		-
																												-
With an allowance recorded:																												-
Residential real estate	$	290	$	328	$	31	$	154	$	9	$	188	$	6	$	254	$	278	$	27	$	179	$	5	$	272	$	(4	)
Home equity		21		21		3		21		1		21		0		21		21		3		21		1		21		-
Commercial real estate		846		847		446		844		0		849		0		845		845		456		844		-		846		-
Construction and land development		0		-		-		0		0		0		0		-		-		-		-		-		-		-
Multifamily		0		-		-		0		0		0		0		-		-		-		-		-		-		-
Commercial business		306		369		251		338		16		311		0		316		321		263		332		14		311		(2	)
Consumer		0		-		-		0		0		0		0		-		-		-		-		-		-		-
Manufactured homes		0		-		-		0		0		0		0		-		-		-		-		-		-		-
Government		0		-		-		0		0		0		0		-		-		-		-		-		-		-

Total:
Residential real estate	$	2,347	$	5,172	$	31	$	2,592	$	164	$	3,004	$	131	$	3,323	$	4,837	$	27	$	2,775	$	211	$	2,835	$	47
Home equity	$	154	$	274	$	3	$	235	$	14	$	212	$	6	$	243	$	259	$	3	$	237	$	15	$	199	$	1
Commercial real estate	$	3,816	$	4,083	$	446	$	3,292	$	220	$	4,139	$	210	$	5,229	$	5,417	$	456	$	3,776	$	196	$	4,523	$	(24	)
Construction & land development	$	800	$	1,023	$	-	$	573	$	0	$	860	$	0	$	-	$	-	$	-	$	430	$	13	$	400	$	13
Multifamily	$	2,940	$	3,269	$	-	$	2,337	$	62	$	3,228	$	62	$	2,804	$	3,253	$	-	$	2,454	$	86	$	2,872	$	24
Commercial business	$	1,330	$	1,393	$	251	$	1,497	$	92	$	1,447	$	61	$	1,388	$	1,502	$	263	$	1,469	$	93	$	1,359	$	1
Consumer	$	20	$	20	$	-	$	14	$	0	$	21	$	0	$	19	$	19	$	-	$	15	$	1	$	20	$	1
Manufactured homes	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Government	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	-	$	-	$	-	$	-	$	-	$	-	$	-

For the six months ended

For the three months ended

As of December 31, 2021

June 30, 2021

June 30, 2021

(Dollars in thousands)

Recorded
Investment

Unpaid Principal
Balance

Related Allowance

Average Recorded
Investment

Interest Income
Recognized

Average
Recorded
Investment

Interest Income
Recognized

With no related allowance recorded:

Residential real estate
$ 1,683 $ 3,017 $ - $ 1,735 $ 42 $ 1,817 $ 20
Home equity
262 275 - 317 5 341 1
Commercial real estate
765 765 - 1,295 26 1,174 14
Construction & land development
0 0 - 0 0 0 0
Multifamily
556 647 - 670 11 708 6
Commercial business
1,205 1,324 - 1,447 36 1,467 18
Consumer
0 0 - 0 0 0 0
Manufactured homes
0 0 - 0 0 0 0
Government
0 0 - 0 0 0 0

With an allowance recorded:

Residential real estate
$ 88 $ 88 $ 17 $ 198 $ 5 $ 165 $ 0
Home equity
22 22 4 15 0 23 0
Commercial real estate
835 835 386 5,655 113 5,901 63
Construction & land development
0 - - 0 0 0 0
Multifamily
0 - - 0 0 0 0
Commercial business
392 392 277 719 22 704 11
Consumer
0 - - 0 0 0 0
Manufactured homes
0 - - 0 0 0 0
Government
0 - - 0 0 0 0

Total:

Residential real estate
$ 1,771 $ 3,105 $ 17 $ 1,933 $ 47 $ 1,982 $ 20
Home equity
$ 284 $ 297 $ 4 $ 332 $ 5 $ 364 $ 1
Commercial real estate
$ 1,600 $ 1,600 $ 386 $ 6,950 $ 139 $ 7,075 $ 77
Construction & land development
$ 0 $ 0 $ - $ 0 $ 0 $ 0 $ 0
Multifamily
$ 556 $ 647 $ - $ 670 $ 11 $ 708 $ 6
Commercial business
$ 1,597 $ 1,716 $ 277 $ 2,166 $ 58 $ 2,171 $ 29
Consumer
$ 0 $ 0 $ - $ 0 $ 0 $ 0 $ 0
Manufactured homes
$ - $ - $ - $ 0 $ 0 $ 0 $ 0
Government
$ - $ - $ - $ 0 $ 0 $ 0 $ 0

							For the nine months ended				For the three months ended
	As of December 31, 2021						September 30, 2021				September 30, 2021
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	1,683	$	3,017	$	-	$	1,691	$	83	$	1,565	$	41
Home equity		262		275		-		307		7		273		2
Commercial real estate		765		765		-		1,268		39		1,362		13
Construction & land development		-		-		-		-		-		-		-
Multifamily		556		647		-		647		20		587		9
Commercial business		1,205		1,324		-		1,410		33		1,354		(3	)
Consumer		-		-		-		-		-		-		-
Manufactured homes		-		-		-		-		-		-		-
Government		-		-		-		-		-		-		-

With an allowance recorded:
Residential real estate	$	88	$	88	$	17	$	159	$	1	$	102	$	(4	)
Home equity		22		22		4		17		1		22		1
Commercial real estate		835		835		386		5,700		145		5,852		32
Construction & land development		-		-		-		-		-		-		-
Multifamily		-		-		-		-		-		-		-
Commercial business		392		392		277		698		15		659		(7	)
Consumer		-		-		-		-		-		-		-
Manufactured homes		-		-		-		-		-		-		-
Government		-		-		-		-		-		-		-

Total:
Residential real estate	$	1,771	$	3,105	$	17	$	1,850	$	84	$	1,667	$	37
Home equity	$	284	$	297	$	4	$	324	$	8	$	295	$	3
Commercial real estate	$	1,600	$	1,600	$	386	$	6,968	$	184	$	7,214	$	45
Construction & land development	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Multifamily	$	556	$	647	$	-	$	647	$	20	$	587	$	9
Commercial business	$	1,597	$	1,716	$	277	$	2,108	$	48	$	2,012	$	(10	)
Consumer	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Manufactured homes	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Government	$	-	$	-	$	-	$	-	$	-	$	-	$	-

The Bancorp's age analysis of past due loans is summarized below:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investments Greater than 90 Days Past Due and Accruing		30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investments Greater than 90 Days Past Due and Accruing
June 30, 2022
September 30, 2022
Residential real estate	$	2,137	$	2,306	$	3,260	$	7,703	$	451,448	$	459,151	$	610	$	2,266	$	1,929	$	2,539	$	6,734	$	464,831	$	471,565	$	348
Home equity		114		7		527		648		35,024		35,672		0		193		-		521		714		36,864		37,578		-
Commercial real estate		135		1,734		2,477		4,346		416,389		420,735		517		1,004		162		3,350		4,516		448,336		452,852		1,071
Construction and land development		337		56		0		393		153,029		153,422		0		46		-		-		46		134,255		134,301		-
Multifamily		24		307		109		440		248,055		248,495		0		474		908		288		1,670		256,707		258,377		181
Commercial business		1,706		1,205		281		3,192		100,457		103,649		81		1,662		1,466		532		3,660		91,712		95,372		342
Consumer		4		0		0		4		1,669		1,673		0		-		-		-		-		827		827		-
Manufactured homes		230		334		0		564		37,129		37,693		0		572		313		41		926		34,940		35,866		40
Government		0		0		0		0		8,081		8,081		0		-		-		-		-		9,649		9,649		-
Total	$	4,687	$	5,949	$	6,654	$	17,290	$	1,451,281	$	1,468,571	$	1,208	$	6,217	$	4,778	$	7,271	$	18,266	$	1,478,121	$	1,496,387	$	1,982

December 31, 2021
Residential real estate	$	2,507	$	824	$	2,142	$	5,473	$	254,661	$	260,134	$	31	$	2,507	$	824	$	2,142	$	5,473	$	254,661	$	260,134	$	31
Home equity		169		67		565		801		33,811		34,612		34		169		67		565		801		33,811		34,612		34
Commercial real estate		231		1,960		944		3,135		314,010		317,145		91		231		1,960		944		3,135		314,010		317,145		91
Construction and land development		5,148		283		0		5,431		118,391		123,822		0		5,148		283		-		5,431		118,391		123,822		-
Multifamily		0		0		109		109		61,085		61,194		0		-		-		109		109		61,085		61,194		-
Commercial business		573		1,594		242		2,409		113,363		115,772		49		573		1,594		242		2,409		113,363		115,772		49
Consumer		0		3		0		3		579		582		0		-		3		-		3		579		582		-
Manufactured homes		633		171		0		804		37,083		37,887		0		633		171		-		804		37,083		37,887		-
Government		0		0		0		0		8,991		8,991		0		-		-		-		-		8,991		8,991		-
Total	$	9,261	$	4,902	$	4,002	$	18,165	$	941,974	$	960,139	$	205	$	9,261	$	4,902	$	4,002	$	18,165	$	941,974	$	960,139	$	205

The Bancorp's loans on nonaccrual status are summarized below:

(Dollars in thousands)	June 30, 2022		December 31, 2021
					September 30, 2022		December 31, 2021
Residential real estate	$	4,975	$	4,651	$	4,965	$	4,651
Home equity		610		623		585		623
Commercial real estate		2,594		940		2,807		940
Construction and land development		0		0		-		-
Multifamily		369		455		367		455
Commercial business		265		387		219		387
Consumer		0		0		-		-
Manufactured homes		0		0		-		-
Government		0		0		-		-
Total	$	8,813	$	7,056	$	8,943	$	7,056

As a result of acquisition activity, the Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At ~~June~~September 30, 2022, total purchased credit impaired loans with unpaid principal balances totaled ~~$11.9~~$10.6 million with a recorded investment of ~~$9.9~~$8.7 million. At December 31, 2021, purchased credit impaired loans with unpaid principal balances totaled $4.2 million with a recorded investment of $2.8 million.

As part of the fair value of loans receivable, there was a net fair value discount for loans acquired of ~~$6.0~~$5.8 million at ~~June~~September 30, 2022, compared to $1.1 million at December 31, 2021.

Accretable yield, or income recorded for the three months ended ~~June~~September 30, is as follows:

(dollars in thousands)	Total		Total

2021	$	300	$	188
2022		440		176

Accretable yield, or income recorded for the ~~six~~nine months ended ~~June~~September 30, is as follows:

(dollars in thousands)	Total		Total
2021	$	605	$	793
2022		547		723

Accretable yield, or income expected to be recorded in the future is as follows:

(dollars in thousands)	Total		Total
Remainder 2022	$	240	$	164
2023		665		665
2024		649		649
2025		507		507
2026 and thereafter		3,565
2026				332
2027 and thereafter				3,464
Total	$	5,958	$	5,781

Note 6 – Intangibles and Acquisition Related Accounting

The Bancorp established a goodwill balance totaling $11.5 million with the acquisition of RYFL, and also maintains goodwill balances totaling $11.1 million from prior acquisitions. Goodwill totaled $22.6 million and $11.1 million as of ~~June~~September 30, 2022 and December 31, 2021, respectively. During the ~~three~~ ~~months~~quarter ended June 30, 2022, there was remeasurement of goodwill reducing the balance by $158 thousand, see Note 3 – Acquisition Activity for more detail on the remeasurement. Goodwill is tested annually for impairment. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Bancorp’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Bancorp to provide quality, cost effective banking services in a competitive marketplace. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. There has not been any impairment of goodwill identified or recorded.

In addition to goodwill, a core deposit intangible was established with the acquisition of RYFL and from previous ~~acquisitons.~~acquisitions. The Bancorp had core deposit intangible balances of ~~$5.6~~$5.2 million and $3.1 million as of ~~June~~September 30, 2022, and December 31, 2021, respectively. The table below summarizes the annual amortization:

The amortization recorded for the ~~three~~nine months ended ~~June~~September 30, is as follows:

(dollars in thousands)	Total		Total
2021	$	249	$	745
2022	$	410	$	1,157

The amortization recorded for the ~~six~~three months ended ~~June~~September 30, is as follows:

(dollars in thousands)	Total		Total
2021	$	497	$	248
2022	$	757	$	400

Amortization to be recorded in future periods, is as follows:

(dollars in thousands)	Total		Total
Current year		795		396
2023		1,522		1,522
2024		1,411		1,411
2025		688		688
2026		360		360
5 years and thereafter		812		812
Total	$	5,588	$	5,189

For the RYFL acquisition, as part of the fair value of certificates of deposit, a fair value premium was established of $1.0 million. Approximately ~~$175~~$134 thousand and ~~$304~~$438 thousand of amortization was taken as income during the ~~three~~quarter and ~~six~~nine months ended ~~June~~September 30, 2022, respectively. It is estimated amortization to be recorded in future periods is as follows; an additional ~~$237~~$103 thousand in 2022, $217 thousand in 2023, $124 thousand in 2024, $72 thousand in 2025, and $55 thousand thereafter.

Note 7 - Concentrations of Credit Risk

The primary lending area of the Bancorp encompasses Lake County in northwest Indiana and Cook County in northeast Illinois, where collectively a majority of loan activity is concentrated. The Bancorp is also an active lender in Porter County, and to a lesser extent, LaPorte, Newton and Jasper counties in Indiana; and DuPage, Lake, and Will counties in Illinois. Substantially all loans are secured by specific items of collateral including residences, commercial real estate, land development, business assets and consumer assets.

Note 8 - Earnings per Share

Earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding. A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations for the ~~three~~quarter and ~~six~~nine months ended ~~June~~September 30, 2022, and 2021, are as follows:

(dollars in thousands except per share data)

Three months ended June 30,

Six months ended June 30,

2022

2021

2022

2021

Basic earnings per common share:

Net income as reported
$ 4,431 $ 3,571 $ 6,566 $ 8,114
Weighted average common shares outstanding
4,242,559 3,478,392 4,108,579 3,475,017
Basic earnings per common share
$ 1.04 $ 1.03 $ 1.60 $ 2.33

Diluted earnings per common share:

Net income as reported
$ 4,431 $ 3,571 $ 6,566 $ 8,114
Weighted average common shares outstanding
4,242,559 3,478,392 4,108,579 3,475,017
Add: Dilutive effect of unvested restricted stock awards
15,944 0 16,316 0
Weighted average common and dilutive potential common shares outstanding
4,258,503 3,478,392 4,124,895 3,475,017
Diluted earnings per common share
$ 1.04 $ 1.03 $ 1.59 $ 2.33

(dollars in thousands except per share data)	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Basic earnings per common share:
Net income as reported	$	4,556	$	3,538	$	11,122	$	11,652
Weighted average common shares outstanding		4,242,568		3,479,139		4,153,733		3,476,406
Basic earnings per common share	$	1.07	$	1.02	$	2.68	$	3.35

Diluted earnings per common share:
Net income as reported	$	4,556	$	3,538	$	11,122	$	11,652
Weighted average common shares outstanding		4,242,568		3,479,139		4,153,733		3,476,406
Add: Dilutive effect of unvested restricted stock awards		18,028		-		16,804		-
Weighted average common and dilutive potential common shares outstanding		4,260,596		3,479,139		4,170,537		3,476,406
Diluted earnings per common share	$	1.07	$	1.02	$	2.67	$	3.35

Note 9 - Stock Based Compensation

The Bancorp’s 2015 Stock Option and Incentive Plan (the “Plan”), which was adopted by the Bancorp’s Board of Directors on February 27, 2015, and approved by the Bancorp’s shareholders on April 24, 2015, permits the grant of equity awards for up to 250,000 shares of common stock. Awards granted under the Plan may be in the form of incentive stock options, non-qualified stock options, restricted stock, unrestricted stock, performance shares, or performance units.

As required by the Stock Compensation Topic, companies are required to record compensation cost for stock options and awards provided to employees in return for employment service. For the ~~three~~ ~~months~~quarter ended ~~June~~September 30, 2022, stock based compensation expense of ~~$163~~$203 thousand was recorded, compared to ~~$139~~$143 thousand for the ~~three~~ ~~months~~quarter ended ~~June~~September 30, 2021. For the ~~six~~nine months ended ~~June~~September 30, 2022, stock based compensation expense of ~~$332~~$535 thousand was recorded, compared to ~~$285~~$428 thousand for the ~~six~~nine months ended ~~June~~September 30, 2021. It is anticipated that current outstanding unvested awards will result in additional compensation expense of approximately ~~$1.5~~$1.4 million through 2025 with an weighted average life of ~~2.1~~2.3 years.

Restricted stock awards are issued with an award price equal to the market price of the Bancorp’s common stock on the award date and vest between three and five years after the grant date. Forfeiture provisions exist for personnel that separate employment before the vesting period expires. A summary of restricted stock activity under the Bancorp’s Plan described above for the ~~the~~ ~~six~~nine months ended ~~June~~September 30, 2022, follows:

Non-vested Shares

Shares

Weighted
Average
Grant Date
Fair Value

Non-vested at January 1, 2022
44,235 $ 42.33
Granted
22,891 46.42
Vested
(11,158 ) 41.63
Forfeited
(1,587 ) 44.17
Non-vested at June 30, 2022
54,381 $ 44.14

Non-vested Shares	Shares			Weighted Average Grant Date Fair Value
Non-vested at January 1, 2022		44,235		$	42.33
Granted		23,842			46.06
Vested		(11,158	)		41.63
Forfeited		(1,587	)		44.17
Non-vested at September 30, 2022		55,332		$	44.03

Note 10 – Change in Accounting Principles

In December 2019, the FASB issued ASU 2019-12 which remove specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences where there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. It also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacts changes in tax laws in interim periods. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Bancorp adopted ASU 2019-12 on January 1, 2021 and it did not have a material impact on its accounting and disclosures.

Note 11 - Upcoming Accounting Standards

In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU includes increased disclosures and various changes to the accounting and measurement of financial assets including the Bancorp’s loans and available-for-sale debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. In October 2019, the FASB voted and approved proposed changes to the effective date of this ASU for smaller reporting companies, such as the Bancorp, and other non-SEC reporting entities. The approval changed the effective date of the ASU to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. The new credit loss guidance will be effective for the Bancorp as of January 1, 2023. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Early adoption for all institutions is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is in the process of evaluating the impact adoption of this update will have on the Bancorp’s consolidated financial statements. This process of evaluation has engaged multiple areas of the Bancorp’s management in discussing loss estimation methods and the application of these methods to specific segments of the loans receivable portfolio. Management has been actively monitoring developments and evaluating the use of different methods allowed. Due to continuing development of understanding of application, additional time is required to understand how this ASU will affect the Bancorp’s financial statements. Management plans on running parallel calculations and finalizing a method or methods of adoption in time for the effective date.

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020, through December 31, 2022. The Bancorp is implementing a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Bancorp believes the adoption of this guidance on activities after December 31, 2020, through December 31, 2022, will not have a material impact on the consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08 related to accounting for acquired revenue contracts with customers in a business combination. The amendments in this update address diversity in practice and inconsistency related to recognition of an acquired contract liability and the effect of payment terms on subsequent revenue recognition for the acquirer. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We plan to adopt this pronouncement for our fiscal year beginning January 1, 2023, and we do not expect it to have a material effect on our consolidated financial statements.

In March 2022, the FASB issued ASU 2022-01 related to the portfolio layer method of hedge accounting. The amendments in this update clarify the accounting and promote consistency in reporting for hedges where the portfolio layer method is applied. This update is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. As we currently do not have items accounted for under the portfolio layer method of hedge accounting, we do not expect the update to have an effect on our consolidated financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which addresses and amends areas identified by the FASB as part of its post-implementation review of the accounting standard that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by companies that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross writeoffs for financing receivables and net investment in leases by year of origination in the vintage disclosures. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for entities that have adopted the CECL accounting standard. Early adoption, however, is permitted if an entity has adopted the CECL accounting standard. The Bancorp is assessing ASU 2022-02 and its impact on its accounting and disclosures.

In June 2022, the FASB issued ASU No. 2022-03 “Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This guidance is effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Bancorp has assessed ASU 2022-03 and does not expect it to have a material impact on its accounting and disclosures.

In September 2022, the FASB issued ASU No.2022-04 “Liabilities - Supplier Finance Programs (Subtopic 405-50)” enhancing the transparency of supplier finance programs and the related financial statement disclosures. The amendments require that a buyer in a supplier finance program disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. ASU 2022-04 is effective January 1, 2023, except for the disclosure of rollforward information, which is effective January 1, 2024, and is not expected to have an impact on the Bancorp’s consolidated financial statements.

Note 12 – Derivative Financial Instruments

The Bancorp uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Bancorp has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Bancorp to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Bancorp enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Bancorp agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Bancorp agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Bancorp’s results of operations.

The Bancorp enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (i.e., interest rate lock commitment). The interest rate lock commitments are considered derivatives and are recorded on the accompanying consolidated balance sheets at fair value in accordance with FASB ASC 815, Derivatives and Hedging.

The following table shows the amounts of non-hedging derivative financial instruments:

June 30, 2022
September 30, 2022										September 30, 2022
			Asset derivatives			Liability derivatives					Notational or contractual amount			Asset derivatives						Liability derivatives
(Dollars in thousands)	Notational or contractual amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification		Fair value					Statement of Financial Condition classification		Fair value				Statement of Financial Condition classification			Fair value
Interest rate swap contracts	$	92,565	Other assets	$	6,696	Other liabilties		$	6,696		Notational or contractual amount	$	90,181		Other assets		$	9,819			Other liabilties			$	9,819
Interest rate lock commitments		3,965	Other assets		73		N/A		0			2,097		Other assets			31				N/A			-
Total	$	96,530		$	6,769			$	6,696		$	92,278				$	9,850						$	9,819

December 31, 2021	December 31, 2021										December 31, 2021
				Asset derivatives			Liability derivatives					Notational or contractual amount			Asset derivatives						Liability derivatives
(Dollars in thousands)		Notational or contractual amount		Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification		Fair value					Statement of Financial Condition classification		Fair value				Statement of Financial Condition classification			Fair value
Interest rate swap contracts		$	94,154	Other assets	$	2,686	Other liabilties		$	2,686		Notational or contractual amount	$	94,154		Other assets		$	2,686			Other liabilties			$	2,686
Interest rate lock commitments			7,837	Other assets		141		N/A		-			7,837		Other assets			141				N/A			-
Total		$	101,991		$	2,827			$	2,686		$	101,991				$	2,827						$	2,686

The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments:

		Six Months Ended							Nine Months Ended
		June 30,							September 30,
(Dollars in thousands)	Statement of Income Classification	2022			2021			Statement of Income Classification	2022			2021
Interest rate swap contracts	Fees and service charges	$	-		$	218		Fees and service charges	$	3		$	379
Interest rate lock commitments	Gain on sale of loans held-for-sale, net		(68	)		(128	)	Gain on sale of loans held-for-sale, net		(110	)		(152	)
Total	Total	$	(68	)	$	90		Total	$	(107	)	$	227

Three Months Ended

June 30,

(Dollars in thousands)
Statement of Income Classification

2022

2021

Interest rate swap contracts
Fees and service charges
$ - $ 231
Interest rate lock commitments
Gain on sale of loans held-for-sale, net
(93 ) (151 )
Total
$ (93 ) $ 80

~~The following table shows the offsetting of financial assets and derivative assets:~~

Gross Amounts not Offset in the

Statement of Financial Condition

(Dollars in thousands)

Gross Amounts of Recognized Assets

Gross Amounts Offset in the Statement of Financial Condition

Net Amounts of Assets Presented in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Received

Net Amount

June 30, 2022

Interest rate swap contracts
$ 6,696 $ 0 $ 6,696 $ 0 $ 0 $ 6,696
Interest rate lock commitments
73 0 73 0 0 73
Total
$ 6,769 $ 0 $ 6,769 $ 0 $ 0 $ 6,769

							Gross Amounts not Offset in the							Three Months Ended
							Statement of Financial Condition							September 30,
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount		Statement of Income Classification	2022			2021
December 31, 2021
Interest rate swap contracts	$	2,686	$	-	$	2,686	$	-	$	-	$	2,686	Fees and service charges	$	3		$	161
Interest rate lock commitments		141		-		141		-		-		141	Gain on sale of loans held-for-sale, net		(42	)		(24	)
Total	$	2,827	$	-	$	2,827	$	-	$	-	$	2,827	Total	$	(39	)	$	137

The following table shows the offsetting of financial assets and derivative assets:

							Gross Amounts not Offset in the
							Statement of Financial Condition
	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Assets Presented				Cash Collateral Received
(Dollars in thousands)	Recognized Assets		Statement of Financial Condition		in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
September 30, 2022
Interest rate swap contracts	$	9,819	$	-	$	9,819	$	-	$	-	$	9,819
Interest rate lock commitments		31		-		31		-		-		31
Total	$	9,850	$	-	$	9,850	$	-	$	-	$	9,850

							Gross Amounts not Offset in the
							Statement of Financial Condition
	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Liabilities Presented				Cash Collateral Received
(Dollars in thousands)	Recognized Liabilities		Statement of Financial Condition		in the Statement of Financial Condition		Financial Instruments		Cash Collateral Received		Net Amount
December 31, 2021
Interest rate swap contracts	$	2,686	$	-	$	2,686	$	-	$	-	$	2,686
Interest rate lock commitments		141		-		141		-		-		141
Total	$	2,827	$	-	$	2,827	$	-	$	-	$	2,827

The following table shows the offsetting of financial liabilities and derivative liabilities:

																			Gross Amounts not Offset in the
							Gross Amounts not Offset in the												Statement of Financial Condition
							Statement of Financial Condition						Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Liabilities Presented				Cash Collateral Pledged
(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged		Net Amount		Recognized Liabilities		Statement of Financial Condition		in the Statement of Financial Condition		Financial Instruments				Net Amount
June 30, 2022
September 30, 2022
Interest rate swap contracts	$	6,696	$	0	$	6,696	$	0	$	3,930	$	2,766	$	9,819	$	-	$	9,819	$	-		$	3,930		$	5,889
Total	$	6,696	$	0	$	6,696	$	0	$	3,930	$	2,766	$	9,819	$	-	$	9,819	$	-	$	3,930		$	5,889

Gross Amounts not Offset in the

Statement of Financial Condition

(Dollars in thousands)

Gross Amounts of Recognized Liabilities

Gross Amounts Offset in the Statement of Financial Condition

Net Amounts of Liabilities Presented in the Statement of Financial Condition

Financial Instruments

Cash Collateral
Pledged

Net Amount

December 31, 2021

Interest rate swap contracts
$ 2,686 $ - $ 2,686 $ - $ 3,930 $ (1,244 )
Total
$ 2,686 $ - $ 2,686 $ - $ 3,930 $ (1,244 )

							Gross Amounts not Offset in the
							Statement of Financial Condition
	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Liabilities Presented				Cash Collateral Pledged
(Dollars in thousands)	Recognized Liabilities		Statement of Financial Condition		in the Statement of Financial Condition		Financial Instruments		Cash Collateral Pledged		Net Amount
December 31, 2021
Interest rate swap contracts	$	2,686	$	-	$	2,686	$	-	$	3,930	$	(1,244	)
Total	$	2,686	$	-	$	2,686	$	-	$	3,930	$	(1,244	)

Note 13 - Fair Value

The Fair Value Measurements Topic establishes a hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Topic describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgments and assumptions used in pricing could result in different estimates of value. In certain cases where market data is not readily available because of a lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy.

At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with GAAP. Impairment is other-than-temporary if the decline in the fair value is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received. Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates. The Bancorp considers the following factors when determining an other-than-temporary impairment for a security: the length of time and the extent to which the market value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the underlying fundamentals of the relevant market and the outlook for such market for the near future; an assessment of whether the Bancorp (1) has the intent to sell the debt securities before recovery or (2) ~~more likely than~~ ~~not~~identified credit impairment indicating it is unlikely the Bancorp will ~~be required to sell the debt securities before their anticipated market recovery.~~recover its amortized cost basis. If ~~either~~any of these conditions is met, management will recognize other-than-temporary impairment. If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security will be written down for the credit loss, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings.

In addition to the impairment evaluation noted above, the Bancorp’s management utilizes a specialist to perform an other-than-temporary impairment analysis for each of its pooled collateralized debt obligations. The specialist analysis is performed annually in December, or when management deems necessary, and utilizes analytical models used to project future cash flows for the pooled collateralized debt obligations based on current assumptions for prepayments, default and deferral rates, and recoveries. The projected cash flows are then tested for impairment consistent with GAAP. The other-than-temporary impairment testing compares the present value of the cash flows from quarter to quarter to determine if there is a “favorable” or “adverse” change. Other-than-temporary impairment is recorded if the projected present value of cash flows is lower than the book value of the security. To perform the other-than-temporary impairment analysis, management utilizes current reports issued by the trustee, which contain principal and interest tests, waterfall distributions, note valuations, collection detail and credit ratings for each pooled collateralized debt obligation. In addition, a detailed review of the performing collateral was performed. Based on current market conditions and a review of the trustee reports, management performed an analysis of the pooled collateralized debt obligations and 0no additional impairment was taken at December 31, 2021. In addition, the collateralized debt obligation portfolio was reviewed in accordance with our quarterly impairment evaluation, as described in the preceding paragraph, noting 0no additional impairment was taken at ~~June~~September 30, 2022.

The table below shows the credit loss roll forward on a year-to-date basis for the Bancorp’s pooled collateralized debt obligations that have been classified with other-than-temporary impairment:

	(Dollars in thousands)		(Dollars in thousands)
	Collateralized debt obligations		Collateralized debt obligations
	other-than-temporary impairment		other-than-temporary impairment
Ending balance, December 31, 2021	$	173	$	173
Additions not previously recognized		0		-
Ending balance, June 30, 2022	$	173
Ending balance, September 30, 2022			$	173

At ~~June~~September 30, 2022, collateralized debt obligations with a cost basis of $2.2 million continue to be in “payment in kind” status. These collateralized debt obligations classified as “payment in kind” are a result of not receiving the scheduled quarterly interest payments. For these collateralized debt obligations in “payment in kind” status, management anticipates to receive the unpaid contractual interest payments from the issuer, because of the self-correcting cash flow waterfall provisions within the structure of the securities. When a tranche senior to the Bancorp’s position fails the coverage test, the Bancorp’s interest cash flows are paid to the senior tranche and recorded as a reduction of principal. The coverage test represents an over collateralization target by stating the balance of the performing collateral as a percentage of the balance of the Bancorp’s tranche, plus the balance of all senior tranches. The principal reduction in the senior tranche continues until the appropriate coverage test is passed. As a result of the principal reduction in the senior tranche, more cash is available for future payments to the Bancorp’s tranche. Consistent with GAAP, management considered the failure of the issuer of the security to make scheduled interest payments in determining whether a credit loss existed. Management will not capitalize the “payment in kind” interest payments to the book value of the securities and will keep these securities in non-accrual status until the quarterly interest payments resume on a consistent basis.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

There were no transfers to or from Levels 1 and 2 during the ~~six~~nine months ended ~~June~~September 30, 2022. Assets measured at fair value on a recurring basis are summarized below:

			(Dollars in thousands)
			Fair Value Measurements at June 30, 2022 Using								(Dollars in thousands)
											Fair Value Measurements at September 30, 2022 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Interest rate swap contracts	$	6,696	$	0	$	6,696	$	0	$	9,819	$	-	$	9,819	$	-
Interest rate lock commitments		73		0		73		0		31		-		31		-
Available-for-sale debt securities:
U.S. government sponsored entities		7,934		0		7,934		0		7,545		-		7,545		-
U.S. treasury securities		594		0		594		0		394		-		394		-
Collateralized mortgage obligations and residential mortgage-backed securities		150,061		0		150,061		0		137,281		-		137,281		-
Municipal securities		240,847		0		240,847		0		212,788		-		212,788		-
Collateralized debt obligations		1,030		0		0		1,030		1,027		-		-		1,027
Total securities available-for-sale	$	400,466	$	0	$	399,436	$	1,030	$	359,035	$	-	$	358,008	$	1,027

Liabilities:
Interest rate swap contracts	$	6,696	$	0	$	6,696	$	0	$	9,819	$	-	$	9,819	$	-

(Dollars in thousands)

Fair Value Measurements at December 31, 2021 Using

(Dollars in thousands)

Estimated
Fair
Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Assets:

Interest rate swap contracts
$ 2,686 $ 0 $ 2,686 $ 0
Interest rate lock commitments
141 0 141 0
Available-for-sale debt securities:

U.S. government sponsored entities
8,669 0 8,669 0
U.S. treasury securities
400 0 400 0
Collateralized mortgage obligations and residential mortgage-backed securities
184,701 0 184,701 0
Municipal securities
332,127 0 332,127 0
Collateralized debt obligations
992 0 0 992
Total securities available-for-sale
$ 526,889 $ 0 $ 525,897 $ 992

Liabilities:

Interest rate swap contracts
$ 2,686 $ 0 $ 2,686 $ 0

			(Dollars in thousands)
			Fair Value Measurements at December 31, 2021 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Interest rate swap contracts	$	2,686	$	-	$	2,686	$	-
Interest rate lock commitments		141		-		141		-
Available-for-sale debt securities:
U.S. government sponsored entities		8,669		-		8,669		-
U.S. treasury securities		400		-		400		-
Collateralized mortgage obligations and residential mortgage-backed securities		184,701		-		184,701		-
Municipal securities		332,127		-		332,127		-
Collateralized debt obligations		992		-		-		992
Total securities available-for-sale	$	526,889	$	-	$	525,897	$	992

Liabilities:
Interest rate swap contracts	$	2,686	$	-	$	2,686	$	-

A roll forward of available-for-sale securities, which require significant adjustment based on unobservable data, are presented in the following table:

	(Dollars in thousands)			(Dollars in thousands)
	Estimated Fair Value Measurements Using Significant Unobservable Inputs (Level 3)			Estimated Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Available-for- sale securities			Available-for- sale securities
Beginning balance, January 1, 2021	$	929		$	929
Principal payments		(9	)		(9	)
Total unrealized gains, included in other comprehensive income		50			91
Ending balance, June 30, 2021	$	970
Ending balance, September 30, 2021				$	1,011

Beginning balance, January 1, 2022	$	992		$	992
Principal payments		0			-
Total unrealized gains, included in other comprehensive income		38			35
Ending balance, June 30, 2022	$	1,030
Ending balance, September 30, 2022				$	1,027

Assets measured at fair value on a non-recurring basis are summarized below:

			(Dollars in thousands)
			Fair Value Measurements at June 30, 2022 Using								(Dollars in thousands)
											Fair Value Measurements at September 30, 2022 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	1,309	$	0	$	0	$	1,309	$	1,743	$	-	$	-	$	1,743

			(Dollars in thousands)
			Fair Value Measurements at December 31, 2021 Using								(Dollars in thousands)
											Fair Value Measurements at December 31, 2021 Using
(Dollars in thousands)	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	896	$	0	$	0	$	896	$	896	$	-	$	-	$	896

Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2 inputs. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy. The fair value of foreclosed real estate is similarly determined by using the results of recent real estate appraisals. The numerical range of unobservable inputs for these valuation assumptions is not meaningful to this presentation.

The following table shows carrying values and related estimated fair values of financial instruments as of the dates indicated. Estimated fair values are further categorized by the inputs used to measure fair value. Items that are not financial instruments are not included.

	June 30, 2022				Estimated Fair Value Measurements at June 30, 2022 Using						September 30, 2022				Estimated Fair Value Measurements at September 30, 2022 Using
(Dollars in thousands)	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	79,302	$	79,302	$	79,302	$	0	$	0	$	38,296	$	38,296	$	38,296	$	-	$	-
Certificates of deposit in other financial institutions		1,482		1,453		0		1,453		0		2,214		2,187		-		2,187		-
Loans held-for-sale		1,525		1,552		0		1,552		0		997		1,006		-		1,006		-
Loans receivable, net		1,460,975		1,418,593		0		0		1,418,593		1,489,298		1,430,158		-		-		1,430,158
Federal Home Loan Bank stock		3,038		3,038		0		3,038		0		3,038		3,038		-		3,038		-
Accrued interest receivable		6,892		6,892		0		6,892		0		6,849		6,849		-		6,849		-

Financial liabilities:
Non-interest bearing deposits		370,567		370,567		370,567		0		0		386,137		386,137		386,137		-		-
Interest bearing deposits		1,546,648		1,547,211		1,148,252		398,959		0		1,446,827		1,446,800		1,119,174		327,626		-
Repurchase agreements		24,536		24,311		16,273		8,038		0		21,966		21,803		14,253		7,550		-
Borrowed funds												56,174		56,170		19,174		36,996		-
Accrued interest payable		56		56		0		56		0		106		106		-		106		-

	December 31, 2021				Estimated Fair Value Measurements at December 31, 2021 Using						December 31, 2021				Estimated Fair Value Measurements at December 31, 2021 Using
(Dollars in thousands)	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	33,176	$	33,176	$	33,176	$	0	$	0	$	33,176	$	33,176	$	33,176	$	-	$	-
Certificates of deposit in other financial institutions		1,709		1,737		0		1,737		0		1,709		1,737		-		1,737		-
Loans held-for-sale		4,987		5,065		0		5,065		0		4,987		5,065		-		5,065		-
Loans receivable, net		953,377		951,744		0		0		951,744		953,377		951,744		-		-		951,744
Federal Home Loan Bank stock		3,247		3,247		0		3,247		0		3,247		3,247		-		3,247		-
Accrued interest receivable		5,444		5,444		0		5,444		0		5,444		5,444		-		5,444		-

Financial liabilities:
Non-interest bearing deposits		295,294		295,294		295,294		0		0		295,294		295,294		295,294		-		-
Interest bearing deposits		1,138,907		1,139,126		899,690		239,436		0		1,138,907		1,139,126		899,690		239,436		-
Repurchase agreements		14,581		14,579		12,842		1,737		0		14,581		14,579		12,842		1,737		-
Accrued interest payable		22		22		0		22		0		22		22		-		22		-

The following methods were used to estimate the fair value of financial instruments presented in the preceding table for the periods ended ~~June~~September 30, 2022 and December 31, 2021:

Cash and cash equivalent carrying amounts approximate fair value. Certificates of deposits in other financial institutions carrying amounts approximate fair value (Level 2). The fair values of securities available-for-sale are obtained from broker pricing (Level 2), with the exception of collateralized debt obligations, which are valued by a third-party specialist (Level 3). Loans held-for-sale comprise residential mortgages and are priced based on values established by the secondary mortgage markets (Level 1). The estimated fair value for net loans receivable is based on the exit price notion which is the exchange price that would be received to transfer the loans at the most advantageous market price in an orderly transaction between market participants on the measurement date (Level 3). Federal Home Loan Bank stock is estimated at book value due to restrictions that limit the sale or transfer of the security. Interest rate swap agreements, both assets and liabilities, are valued by a third-party pricing agent using an income approach (Level 2). Fair values of accrued interest receivable and payable approximate book value, as the carrying values are determined using the observable interest rate, balance, and last payment date.

Non-interest and interest bearing deposits, which include checking, savings, and money market deposits, are estimated to have fair values based on the amount payable as of the reporting date (Level 1). The fair value of fixed-maturity certificates of deposit (included in interest bearing deposits) are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Estimated fair values for short-term repurchase agreements, which represent sweeps from demand deposits to accounts secured by pledged securities, are estimated based on the amount payable as of the reporting date (Level 1). Longer-term repurchase agreements, with contractual maturity dates of three months or more, are based on estimates of the rate the Bancorp would pay on similar deposits, applied for the time period until maturity (Level 2). Short-term borrowings are generally only held overnight, therefore, their carrying amount is a reasonable estimate of fair value (Level 1). The fair value of FHLB Advances are estimated by discounting the future cash flows using quoted rates from the FHLB for similar advances with similar maturities (Level 2). The estimated fair value of other financial instruments, and off-balance sheet loan commitments, approximate cost and are not considered significant to this presentation.

Note 14 - Borrowings

At September 30, 2022, and December 31, 2021, borrowed funds are summarized below:

	(Dollars in thousands)
	September 30,		December 31,
	2022		2021
Variable rate advances from the FHLB.		37,000		-
Line of credit at FHLB		19,174		-
Total	$	56,174	$	-

At September 30, 2022, scheduled maturities of borrowed funds were as follows:

	(Dollars in thousands)
Remainder 2022	$	-
2023		37,000
Total	$	37,000

At September 30, 2022 and December 31, 2021 advances from the Federal Home Loan Bank were as follows:

	(Dollars in thousands)
	September 30,		December 31,
	2022		2021
Variable rate advances, as of September 30, 2022, average rate: 3.45%, none outstanding as of December 31, 2021	$	37,000	$	-

Variable rate advances are payable at maturity. The advances were collateralized by loans with a carrying value totaling approximately $877 million at September 30, 2022. In addition to the variable rate advances, the Bancorp maintains a $25.0 million line of credit with the Federal Home Loan Bank of Indianapolis. The Bancorp carried a balance of $19.2 million at an average rate of 3.47% at September 30, 2022, and did not have a balance on the line of credit at December 31, 2021. The Bancorp did not have other borrowings at September 30, 2022, or as of December 31, 2021.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Summary

Finward Bancorp (the ~~“Bancorp” or “Finward”~~“Bancorp”) is a financial holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank (“the Bank”), an Indiana commercial bank, and NWIN Risk Management, Inc., a captive insurance company, are wholly-owned subsidiaries of the Bancorp. The Bancorp has no other business activity other than being a holding company for the Bank and NWIN Risk Management, Inc. The following management’s discussion and analysis presents information concerning our financial condition as of ~~June~~September 30, 2022, as compared to December 31, 2021, and the results of operations for the quarter and ~~six~~nine months ending ~~June~~September 30, 2022, and ~~June~~September 30, 2021. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

At ~~June~~September 30, 2022, the Bancorp had total assets of $2.1 billion, ~~total~~ loans receivable, net of deferred fees and costs, of $1.5 billion and total deposits of ~~$1.9~~$1.8 billion. Stockholders' equity totaled ~~$136.7~~$118.0 million or ~~6.5%~~5.7% of total assets, with a book value per share of ~~$31.80.~~$27.46. Net income for the quarter ended ~~June~~September 30, 2022, was ~~$4.4~~$4.6 million, or ~~$1.04~~$1.07 earnings per common diluted share. For the quarter ended ~~June~~September 30, 2022, the return on average assets (ROA) was ~~0.85%~~0.88%, while the return on average stockholders’ equity (ROE) was ~~12.45%~~13.65%. Net income for the ~~six~~nine months ended ~~June~~September 30, 2022, was ~~$6.6~~$11.1 million, or ~~$1.59~~$2.67 earnings per diluted common share. For the ~~six~~nine months ended ~~June~~September 30, 2022, the ROA was ~~0.65%~~0.73%, while the ROE was ~~8.40%~~9.98%.

Recent Developments

Acquisition of Royal Financial, Inc. On January 31, 2022, the Bancorp completed its acquisition of Royal Financial, Inc. (“RYFL”) pursuant to an Agreement and Plan of Merger dated July 28, 2021 (the “Merger Agreement”) between the Bancorp and RYFL. Pursuant to the terms of the Merger Agreement, RYFL merged with and into the Bancorp, with the Bancorp as the surviving corporation (the “RYFL Merger”). Simultaneous with the RYFL Merger, Royal Savings Bank, an Illinois state-chartered savings bank and wholly-owned subsidiary of RYFL, merged with and into the Bank, with the Bank as the surviving institution.

Under the terms of the Merger Agreement, RYFL stockholders who owned 101 or more shares of RYFL common stock were permitted to elect to receive either 0.4609 shares of Finward common stock or $20.14 in cash, or a combination of both, for each share of RYFL common stock owned, subject to proration and allocation provisions such that 65% of the shares of RYFL common stock outstanding immediately prior to the closing of the merger were converted into the right to receive shares of Finward common stock and the remaining 35% of the outstanding RYFL shares were converted into the right to receive cash. Stockholders holding less than 101 shares of RYFL common stock received fixed consideration of $20.14 in cash and no stock consideration for each share of RYFL common stock.

As a result of RYFL stockholder stock and cash elections and the related allocation and proration provisions of the Merger Agreement, Finward issued 795,423 shares of its common stock and paid cash consideration of approximately $18.7 million in the RYFL Merger. Based on the January 28, 2022 closing price of $47.75 per share of Finward common stock, the transaction had an implied valuation of approximately $56.7 million. The acquisition further expanded the Bank’s banking center network in Cook County and DuPage County, Illinois, expanding the Bank’s full-service retail banking network.

Financial Condition

During the ~~six~~nine months ended ~~June~~September 30, 2022, total assets increased by ~~$480.7~~$432.2 million ~~(29.7%~~(26.7%), with interest-earning assets increasing by ~~$415.3~~$355.8 million ~~(27.3%~~(23.3%). At ~~June~~September 30, 2022, interest-earning assets totaled $1.9 billion compared to $1.5 billion at December 31, 2021. Earning assets represented ~~92.3%~~91.6% of total assets at ~~June~~September 30, 2022 and 94.0% of total assets at December 31, 2021. The increase in total assets and interest earning assets for the ~~six~~nine months was primarily the result of the acquisition of RYFL.

Net loans receivable totaled $1.5 billion at ~~June~~September 30, 2022, compared to $953.4 million at December 31, 2021. The loan portfolio, which is the Bancorp’s largest asset, is the primary source of both interest and fee income. The Bancorp’s lending strategy emphasizes quality loan growth, product diversification, and competitive and profitable pricing.

The Bancorp’s end-of-period loan balances were as follows:

	(unaudited)
	September 30,					December 31,
(Dollars in thousands)	2022					2021
	Balance		% Loans			Balance			% Loans

Residential real estate	$	471,565		31.5	%		260,134			33.0	%
Home equity		37,578		2.5	%		34,612			5.4	%
Commercial real estate		452,852		30.3	%		317,145			31.2	%
Construction and land development		134,301		9.0	%		123,822			9.7	%
Multifamily		258,377		17.3	%		61,194			5.7	%
Consumer		827		0.1	%		582			0.1	%
Manufactured Homes		35,866		2.4	%		37,887			1.8	%
Commercial business		95,372		6.4	%		115,772			11.4	%
Government		9,649		0.5	%		8,991			1.7	%
Loans receivable		1,496,387		100.0	%		960,139			100.0	%
Plus:
Net deferred loans origination costs		5,767					6,810
Undisbursed loan funds		542					(229	)
Loans receivable, net of deferred fees and costs	$	1,502,696				$	966,720

Adjustable rate loans / loans receivable	$	680,944		45.5	%	$	542,975			56.6	%

	(unaudited)
	September 30,			December 31,
	2022			2021

Loans receivable to total assets		73.2	%		59.6	%
Loans receivable to earning assets		79.9	%		63.4	%
Loans receivable to total deposits		82.0	%		67.4	%

The ~~Bancorp’s end-of-period loan balances were as follows:~~

(unaudited)

June 30,

December 31,

(Dollars in thousands)

2022

2021

Balance

% Loans

Balance

% Loans

Residential real estate
$ 459,151 31.3 % 260,134 33.0 %
Home equity
35,672 2.4 % 34,612 5.4 %
Commercial real estate
420,735 28.6 % 317,145 31.2 %
Construction and land development
153,422 10.4 % 123,822 9.7 %
Multifamily
248,495 16.9 % 61,194 5.7 %
Consumer
1,673 0.1 % 582 0.1 %
Manufactured Homes
37,693 2.6 % 37,887 1.8 %
Commercial business
103,649 7.1 % 115,772 11.4 %
Government
8,081 0.6 % 8,991 1.7 %
Loans receivable
1,468,571 100.0 % 960,139 100.0 %
Plus:

Net deferred loans origination costs
6,482 6,810
Undisbursed loan funds
(672 ) (229 )
Loans receivable, net of deferred fees and costs
$ 1,474,381 $ 966,720

Adjustable rate loans / loans receivable
$ 636,956 43.4 % $ 542,975 56.6 %

(unaudited)

June 30,

December 31,

2022

2021

Loans receivable to total assets
70.2 % 59.6 %
Loans receivable to earning assets
76.0 % 63.4 %
Loans receivable to total deposits
76.9 % 67.4 %

~~The~~ following table sets forth certain information at ~~June~~September 30, 2022, regarding the dollar amount of loans in the Bancorp’s portfolio based on their contractual terms to maturity. Demand loans, loans having no schedule of repayment and no stated maturity, and overdrafts are reported as due in one year or less. Contractual principal repayments of loans do not necessarily reflect the actual term of the loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Bancorp the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the property subject to the mortgage. The amounts are stated in thousands (000’s).

	Maturing		After one		After five						Maturing		After one		After five
	within		but within		but within		After				within		but within		but within		After
	one year		five years		fifteen years		fifteen years		Total		one year		five years		fifteen years		fifteen years		Total
Residential real estate	$	14,161	$	28,807	$	106,023	$	310,160		459,151	$	8,806	$	27,474	$	106,061	$	329,224	$	471,565
Home equity		4,598		21,818		8,979		277		35,672		20,013		259		2,409		14,897		37,578
Commercial real estate		24,809		106,633		287,314		1,979		420,735		26,255		100,000		325,995		602		452,852
Construction and land development		33,355		42,343		58,097		19,627		153,422		37,561		37,949		39,928		18,863		134,301
Multifamily		20,093		101,066		124,754		2,582		248,495		27,292		102,202		126,515		2,368		258,377
Consumer		30		731		912		-		1,673		110		660		57		-		827
Manufactured Homes		-		61		10,190		27,442		37,693		-		56		9,809		26,001		35,866
Commercial business		43,699		42,507		16,948		495		103,649		35,272		44,523		14,891		686		95,372
Government		100		3,211		4,770		-		8,081		100		3,063		6,486		-		9,649
Total loans receivable	$	140,845	$	347,177	$	617,987	$	362,562	$	1,468,571	$	155,409	$	316,186	$	632,151	$	392,641	$	1,496,387

The Bancorp is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the ~~six~~nine months ended ~~June~~September 30, 2022, the Bancorp originated ~~$33.5~~$40.8 million in new fixed rate mortgage loans for sale, compared to ~~$94.2~~$120.1 million during the ~~six~~nine months ended ~~June~~September 30, 2021. Net gains realized from the mortgage loan sales totaled ~~$898 thousand~~$1.2 million for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to ~~$3.2~~$4.4 million for the ~~six~~nine months ended ~~June~~September 30, 2021. The decrease in net gains realized from mortgage loan sales for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to the prior year period is primarily due to lower demand for fixed rate mortgage loans as a result of increases in mortgage rates, which in-turn has resulted in a slowing in the sale of these mortgage loans. At ~~June~~September 30, 2022, the Bancorp had ~~$1.5 million~~$997 thousand in loans that were classified as held for sale, compared to $5.0 million at December 31, 2021.

Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status. At ~~June~~September 30, 2022, non-performing loans that remained accruing and more than 90 days past due include ~~four~~two residential real estate loans totaling ~~$610~~$348 thousand, ~~three~~six commercial real estate loans totaling ~~$517 thousand, and two~~$1.1 million, four commercial business loans totaling ~~$81~~$342 thousand, one multifamily loan totaling $181 thousand, and one consumer manufactured home loan of $41 thousand. The Bancorp will at times maintain certain loans on accrual status, despite being over 90 days past due, for short periods of time when management has reason to believe payments are in the process of being received.

The Bancorp's nonperforming loans are summarized below:

(Dollars in thousands)	(unaudited)						(unaudited)
Loan Segment	June 30, 2022			December 31, 2021			September 30, 2022			December 31, 2021
Residential real estate	$	5,585		$	4,682		$	5,313		$	4,682
Home equity		610			657			585			657
Commercial real estate		3,111			1,031			3,878			1,031
Construction and land development		-			-			-			-
Multifamily		369			455			548			455
Commercial business		346			436			561			436
Consumer		-			-			-			-
Manufactured homes		-			-			40			-
Government		-			-			-			-
Total	$	10,021		$	7,261		$	10,925		$	7,261
Nonperforming loans to total loans		0.68	%		0.75	%		0.73	%		0.75	%
Nonperforming loans to total assets		0.48	%		0.45	%		0.53	%		0.45	%

Substandard loans include potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. No loans were internally classified as doubtful or loss at ~~June~~September 30, 2022 or December 31, 2021.

The Bancorp's substandard loans are summarized below:

(Dollars in thousands)	(unaudited)				(unaudited)
Loan Segment	June 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Residential real estate	$	6,019	$	3,722	$	6,027	$	3,722
Home equity		624		632		598		632
Commercial real estate		6,845		3,562		8,301		3,562
Construction and land development		-		-		-		-
Multifamily		2,901		384		2,768		384
Commercial business		279		387		228		387
Consumer		-		-		-		-
Manufactured homes		-		-		-		-
Government		-		-		-		-
Total	$	16,668	$	8,687	$	17,922	$	8,687

The increase in substandard loans is the result of loans acquired pursuant to the RYFL acquisition.

In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of special mention loans. Special mention loans represent loans management is closely monitoring due to one or more factors that may cause the loan to become classified as substandard.

The Bancorp's special mention loans are summarized below:

(Dollars in thousands)

(unaudited)

Loan Segment

June 30, 2022

December 31, 2021

Residential real estate
$ 2,055 $ 2,940
Home equity
400 415
Commercial real estate
10,890 12,011
Construction and land development
800 3,630
Multifamily
1,541 153
Commercial business
3,057 1,915
Consumer
- -
Manufactured homes
- 59
Government
- -
Total
$ 18,743 $ 21,123

(Dollars in thousands)	(unaudited)
Loan Segment	September 30, 2022		December 31, 2021
Residential real estate	$	1,297	$	2,940
Home equity		391		415
Commercial real estate		11,754		12,011
Construction and land development		2,172		3,630
Multifamily		2,608		153
Commercial business		2,931		1,915
Consumer		-		-
Manufactured homes		-		59
Government		-		-
Total	$	21,153	$	21,123

A loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. Typically, management does not individually classify smaller-balance homogeneous loans, such as residential mortgages or consumer loans, as impaired, unless they are troubled debt restructurings.

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. Purchased loans with evidence of credit quality deterioration since origination are considered purchased credit impaired loans. Expected future cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable (“accretable yield”). The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and represents probable losses in the portfolio. In determining the acquisition date fair value of purchased credit impaired loans, and in subsequent accounting, the Bancorp aggregates these purchased loans into pools of loans by common risk characteristics, such as credit risk rating and loan type. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.

The Bancorp's impaired loans, including purchased credit impaired loans, are summarized below:

(Dollars in thousands)	(unaudited)				(unaudited)
Loan Segment	June 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Residential real estate	$	2,347	$	1,771	$	3,323	$	1,771
Home equity		154		284		243		284
Commercial real estate		3,816		1,600		5,229		1,600
Construction and land development		800		-		-		-
Multifamily		2,940		556		2,804		556
Commercial business		1,330		1,597		1,388		1,597
Consumer		20		-		19		-
Manufactured homes		-		-		-		-
Government		-		-		-		-
Total	$	11,407	$	5,808	$	13,006	$	5,808

The increase in impaired loans is the result of purchase credit impaired loans acquired pursuant to the RYFL acquisition.

At times, the Bancorp will modify the terms of a loan to forego a portion of interest or principal or reduce the interest rate on the loan to a rate materially less than market rates, or materially extend the maturity date of a loan as part of a troubled debt restructuring. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of expected future cash flows; unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

The Bancorp's troubled debt restructured loans are summarized below:

(Dollars in thousands)	(unaudited)				(unaudited)
Loan Segment	June 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Residential real estate	$	1,230	$	342	$	1,915	$	342
Home equity		84		83		79		83
Commercial real estate		617		747		1,983		747
Construction and land development		-		-		-		-
Multifamily		-		-		-		-
Commercial business		518		694		497		694
Consumer		-		-		-		-
Manufactured homes		-		-		-		-
Government		-		-		-		-
Total	$	2,449	$	1,866	$	4,474	$	1,866

At ~~June~~September 30, 2022, management is of the opinion that there are no loans where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure. Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources.

The allowance for loan losses (ALL) is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses, and decreased by charge-offs net of recoveries. A loan is charged‑off against the allowance by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. The determination of the amounts of the ALL and provisions for loan losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability as of the reporting date. The appropriateness of the current period provision and the overall adequacy of the ALL are determined through a disciplined and consistently applied quarterly process that reviews the Bancorp’s current credit risk within the loan portfolio and identifies the required allowance for loan losses given the current risk estimates.

The Bancorp's provision for loan losses for the ~~six~~nine months ended are summarized below:

(Dollars in thousands)
							(unaudited)
	(unaudited)
Loan Segment	June 30, 2022			June 30, 2021			September 30, 2022			September 30, 2021
Residential real estate	$	226		$	62		$	472		$	250
Home equity		16			96			38			99
Commercial real estate		12			533			(15	)		946
Construction and land development		(375	)		393			(604	)		483
Multifamily		280			114			388			161
Commercial business		(239	)		(53	)		(339	)		(647	)
Consumer		80			9			60			1
Manufactured homes		-			-			-			-
Government		-			-			-			-
Total	$	-		$	1,154		$	-		$	1,293

The Bancorp's charge-off and recovery information is summarized below:

(Dollars in thousands)	(unaudited)								(unaudited)
	As of June 30, 2022								As of the nine months ended September 30, 2022
Loan Segment	Charge-off			Recoveries		Net Charge-offs			Charge-off			Recoveries		Net Charge-offs
Residential real estate	$	-		$	50	$	50		$	-		$	58	$	58
Home equity		-			-		-			-			-		-
Commercial real estate		-			-		-			-			-		-
Construction and land development		-			-		-			-			-		-
Multifamily		-			-		-			-			-		-
Commercial business		-			38		38			(57	)		88		31
Consumer		(37	)		12		(25	)		(50	)		16		(34	)
Manufactured homes		-			-					-			-
Government		-			-		-			-			-		-
Total	$	(37	)	$	100	$	63		$	(107	)	$	162	$	55

The Bancorp's charge-off and recovery information is summarized below:

(Dollars in thousands)	(unaudited)								(unaudited)
	As of the six months ended June 30, 2021								As of the nine months ended September 30, 2021
Loan Segment	Charge-off			Recoveries		Net Charge-offs			Charge-off			Recoveries		Net Charge-offs
Residential real estate	$	(4	)	$	25	$	21		$	(32	)	$	46	$	14
Home equity		(1	)		-		(1	)		(1	)		-		(1	)
Commercial real estate		-			-		-			-			-		-
Construction and land development		-			-		-			-			-		-
Multifamily		-			-		-			-			-		-
Farmland		-			-		-			-			-		-
Commercial business		-			19		19			-			25		25
Consumer		(17	)		5		(12	)		(21	)		6		(15	)
Manufactured homes		-			-					-			-
Government		-			-		-			-			-		-
Total	$	(22	)	$	49	$	27		$	(54	)	$	77	$	23

The ALL provisions take into consideration management’s current judgments about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio mix, and local economic conditions. In determining the provision for loan losses for the current period, management has considered risks associated with the local economy, changes in loan balances and mix, and asset quality.

The Bancorp's allowance to total loans and non-performing loans are summarized below:

(Dollars in thousands)	(unaudited)						(unaudited)
	June 30, 2022			December 31, 2021			September 30, 2022			December 31, 2021

Allowance for loan losses	$	13,406		$	13,343		$	13,398		$	13,343
Total loans	$	1,474,381		$	966,720		$	1,502,696		$	966,720
Non-performing loans	$	10,021		$	7,261		$	10,925		$	7,261
ALL-to-total loans		0.91	%		1.38	%		0.89	%		1.38	%
ALL-to-non-performing loans (coverage ratio)		133.8	%		183.8	%		122.6	%		183.8	%

In addition, management considers reserves that are not part of the ALL that have been established from acquisition activity. The Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments. At ~~June~~September 30, 2022, total purchased credit impaired loans reserves totaled ~~$2.0~~$1.9 million compared to $1.4 million at December 31, 2021. Additionally, the Bancorp has acquired loans where there was ~~not~~no evidence of credit quality deterioration since origination and has marked these loans to their fair values. As part of the fair value of loans receivable, a net fair value discount was established for loans acquired of ~~$6.0~~$5.8 million at ~~June~~September 30, 2022, compared to $1.1 million at December 31, 2021. Details on these fair value marks and the additional reserves created can be found in Note 5, Loans Receivable.

The primary objective of the Bancorp’s investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest bearing balances in other financial institutions, U.S. government securities, federal agency obligations, obligations of state and local municipalities, and corporate securities. The securities portfolio, all of which is designated as available-for-sale, totaled ~~$400.5~~$359.0 million at ~~June~~September 30, 2022, compared to $526.9 million at December 31, 2021, a decrease of ~~$126.4~~$167.9 million ~~(24.0%~~(31.9%). The decrease is attributable to increased unrealized losses within the portfolio and the use of cashflows from the securities portfolio to fund loan growth. The acute increase in interest rates during the ~~six~~nine months ended ~~June~~September 30, 2022, including an increase by the Federal Reserve in the federal funds target rate from 0.25% as of December 31, 2021, to ~~1.75%~~3.25% as of ~~June~~September 30, 2022, was the primary cause of the increase in unrealized losses on available-for-sale securities within the Bancorp’s investment portfolio. Management continues to actively monitor the securities portfolio and does not currently anticipate the need to realize losses from the securities portfolio, and it is unlikely the Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity. At ~~June~~September 30, 2022, the securities portfolio represented ~~20.6%~~19.1% of interest-earning assets and ~~19.1%~~17.5% of total assets compared to 34.6% of interest-earning assets and 32.5% of total assets at December 31, 2021.

The Bancorp’s end-of-period investment portfolio and other short-term investments and stock balances were as follows:

	(unaudited)										(unaudited)
	June 30,					December 31,					September 30,					December 31,
(Dollars in thousands)	2022					2021					2022					2021
	Balance		% Securities			Balance		% Securities			Balance		% Securities			Balance		% Securities

U.S. government sponsored entities	$	7,934		2.0	%	$	8,669		1.6	%	$	7,545		2.1	%	$	8,669		1.6	%
U.S. treasury securities		594		0.2	%		400		0.1	%		394		0.2	%		400		0.1	%
Collateralized mortgage obligations and residential mortgage-backed securities		150,061		37.5	%		184,701		35.1	%		137,281		38.2	%		184,701		35.1	%
Municipal securities		240,847		60.0	%		332,127		63.0	%		212,788		59.2	%		332,127		63.0	%
Collateralized debt obligations		1,030		0.3	%		992		0.2	%		1,027		0.3	%		992		0.2	%
Total securities available-for-sale	$	400,466		100.0	%	$	526,889		100.0	%	$	359,035		100.0	%	$	526,889		100.0	%

	(unaudited)										(unaudited)
	June 30,		December 31,		YTD						September 30,		December 31,		YTD
(Dollars in thousands)	2022		2021		Change						2022		2021		Change
	Balance		Balance		$			%			Balance		Balance		$			%

Interest bearing deposits in other financial institutions	$	55,602	$	19,987	$	35,615			178.2	%	$	11,151	$	19,987	$	(8,836	)		-44.2	%
Fed funds sold		2,856		464		2,392			515.5	%		682		464		218			47.0	%
Certificates of deposit in other financial institutions		1,482		1,709		(227	)		-13.3	%		2,214		1,709		505			29.5	%
Federal Home Loan Bank stock		3,038		3,247		(209	)		-6.4	%		3,038		3,247		(209	)		-6.4	%

The net increase in interest bearing deposits in other financial institutions and fed funds sold is the result of the timing of cash flows and public fund deposits.

The contractual maturities and weighted average yields for the U.S. government securities, agency securities, municipal securities, and collateralized debt obligations at ~~June~~September 30, 2022, are summarized in the table below. Securities not due at a single maturity date, such as mortgage-backed securities and collateralized mortgage obligations are not included in the following table. The carrying values are stated in thousands (000’s).

The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields presented are not on a tax-equivalent basis.

	Within 1 Year					1 - 5 Years					5 - 10 Years					After 10 Years					Total		Within 1 Year					1 - 5 Years					5 - 10 Years					After 10 Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount
U.S. government sponsored entities:	$	-		0.00	%	$	-		0.00	%	$	7,934		1.00	%	$	-		0.00	%	$	7,934	$	-		0.00	%	$	-		0.00	%	$	7,545		1.00	%	$	-		0.00	%	$	7,545
AFS
U.S. treasury securities:
AFS		199		0.13	%		395		2.38	%		-		0.00	%		-		0.00	%		594		-		0.00	%		394		2.38	%		-		0.00	%		-		0.00	%		394
Municipal Securities:
AFS		296		5.14	%		1,561		3.93	%		16,935		3.43	%		222,055		2.76	%		240,847		190		4.84	%		1,578		3.93	%		10,662		3.11	%		200,358		2.74	%		212,788
Trust Preferred Securities:
AFS		-		0.00	%		-		0.00	%		-		0.00	%		1,030		2.57	%		1,030		-		0.00	%		-		0.00	%		-		0.00	%		1,027		4.03	%		1,027
Totals	$	495		3.12	%	$	1,956		3.62	%	$	24,869		2.65	%	$	223,085		2.76	%	$	250,405	$	190		4.84	%	$	1,972		3.62	%	$	18,207		2.24	%	$	201,385		2.75	%	$	221,754

Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes. The Bancorp offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships.

The Bancorp’s end-of-period deposit portfolio balances were as follows:

	(unaudited)									(unaudited)
	June 30,		December 31,		YTD					September 30,		December 31,		YTD
(Dollars in thousands)	2022		2021		Change					2022		2021		Change
	Balance		Balance		$		%			Balance		Balance		$			%

Checking	$	755,256	$	629,038	$	126,218		20.1	%	$	808,696	$	629,038	$	179,658			28.6	%
Savings		436,203		293,976		142,227		48.4	%		427,505		293,976		133,529			45.4	%
Money market		327,360		271,970		55,390		20.4	%		269,110		271,970		(2,860	)		-1.1	%
Certificates of deposit		398,396		239,217		159,179		66.5	%		327,653		239,217		88,436			37.0	%
Total deposits	$	1,917,215	$	1,434,201	$	483,014		33.7	%	$	1,832,964	$	1,434,201	$	398,763			27.8	%

The following table presents the average daily amount of deposits and average rates paid on such deposits for the periods indicated. The amounts are stated ~~inthousands~~in thousands (000’s).

	June 30, 2022								September 30, 2022
	(unaudited)				December 31, 2021				(unaudited)				December 31, 2021
	Amount		Rate %		Amount		Rate %		Amount		Rate %		Amount		Rate %
Noninterest bearing demand deposits	$	361,252		-	$	280,900		-	$	369,703		-	$	280,900		-
Interest bearing demand deposits		347,983		0.07		297,012		0.08		371,697		0.21		297,012		0.08
MMDA accounts		306,827		0.05		253,468		0.13		298,394		0.20		253,468		0.13
Savings accounts		409,210		0.14		277,839		0.06		417,266		0.05		277,839		0.06
Certificates of deposit		387,982		0.15		271,882		0.46		376,652		0.14		271,882		0.46
Total deposits	$	1,813,254		0.08	$	1,381,101		0.18	$	1,833,712		0.12	$	1,381,101		0.18

As of ~~June~~September 30, 2022, and December 31, 2021, approximately ~~$631.5~~$570.0 million and $452.0 million, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.

The increase in overall deposits is the result of the RYFL acquisition, as well as the Bancorp’s efforts to maintain and grow core deposits.

The Bancorp’s borrowed funds are primarily used to fund asset growth not supported by deposit generation. The Bancorp’s end-of-period borrowing balances were as follows:

	(unaudited)									(unaudited)
	June 30,		December 31,		YTD					September 30,		December 31,		YTD
(Dollars in thousands)	2022		2021		Change					2022		2021		Change
	Balance		Balance		$		%			Balance		Balance		$		%

Repurchase agreements	$	24,536	$	14,581	$	9,955		68.3	%	$	21,966	$	14,581	$	7,385		50.6	%
Borrowed funds											56,174		-		56,174		100.0	%
Total borrowed funds	$	24,536	$	14,581	$	9,955		68.3	%	$	78,140	$	14,581	$	63,559		435.9	%

The increase in other borrowed funds were utilized for loan funding purposes Repurchase agreements increased as part of normal account fluctuations within that product line.

Other assets totaled ~~$42.0~~$49.8 million at ~~June~~September 30, 2022, compared to $14.9 million at December 31, 2021. The increase in other assets is primarily related to increased deferred tax assets as result of increased unrealized losses within the securities portfolio. Other liabilities totaled ~~$23.1~~$23.9 million at ~~June~~September 30, 2022, compared to $15.3 ~~milllion~~million at December 31, 2021. The increase in other liabilities is primarily the result of increased fair value of interest rate swap ~~contracts and ACH prefunding liabilities.~~contracts.

Liquidity and Capital Resources

For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, and pay dividends and operating expenses. Because profit and liquidity are often conflicting objectives, management attempts to maximize the Bank’s net interest margin by making adequate, but not excessive, liquidity provisions. Furthermore, funds are managed so that future profits will not be significantly impacted as funding costs increase.

Changes in the liquidity position result from operating, investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. The primary investing activities include loan originations, loan repayments, investments in interest bearing balances in other financial institutions, and the purchase, sale, and maturity of investment securities. Financing activities focus almost entirely on the generation of customer deposits. In addition, the Bancorp utilizes borrowings (i.e., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds.

During the ~~six~~nine months ended ~~June~~September 30, 2022, cash and cash equivalents increased by ~~$46.1~~$5.1 million compared to a ~~$48.7~~$11.9 million increase for the ~~six~~nine months ended ~~June~~September 30, 2021. The primary sources of cash and cash equivalents were cash and cash equivalents from acquisition activity, the sale of loans originated for sale, proceeds from the sale of securities, proceeds from the maturity and paydown of securities, ~~change in deposits,~~ and change in repurchase agreements and other borrowed funds. The primary uses of cash and cash equivalents were the purchase of securities, change in deposits, and loan originations. Cash provided by operating activities totaled ~~$5.9~~$11.6 million for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to cash provided of ~~$13.6~~$16.6 million for the ~~six~~nine month period ended ~~June~~September 30, 2021. Cash provided from operating activities was primarily a result of net income and sale of loans originated for sale, offset by loans originated for sale and net change in other assets, accrued expenses, and other ~~liabilites.~~liabilities. Cash provided from investing activities totaled ~~$24.8~~$10.0 million for the current period, compared to cash outflows of ~~$60.0~~$109.2 million for the ~~six~~nine months ended ~~June~~September 30, 2021. Cash provided from investing activities for the current ~~six~~nine months were primarily related to the cash and cash equivalents from acquisition activity, net, and proceeds from the sales and maturities of securities, offset against the net change in loans receivable and purchase of ~~securites.~~securities. Cash ~~provided~~outflows from financing activities totaled ~~$15.4~~$16.6 million during the current period compared to net cash provided of ~~$95.0~~$104.5 million for the ~~six~~nine months ended ~~June~~September 30, 2021. The net cash ~~provided~~outflows from financing activities were primarily a result of net change in deposits, ~~and~~offset against the change in other borrowed funds. On a cash basis, the Bancorp paid dividends on common stock of ~~$2.4~~$3.7 million for the ~~six~~nine months ended ~~June~~September 30, 2022, and ~~$2.2~~$3.2 million for the ~~six~~nine months ended ~~June~~September 30, 2021.

At ~~June~~September 30, 2022, outstanding commitments to fund loans totaled ~~$276.1~~$279.7 million. Approximately 54.1% of the commitments were at variable rates. Standby letters of credit, which are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party, totaled $13.6 million at ~~June~~September 30, 2022. Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity.

Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the ~~six~~nine months ended ~~June~~September 30, 2022, stockholders' equity decreased by ~~$20.0~~$38.6 million ~~(12.7%~~(24.6%). During the ~~six~~nine months ended ~~June~~September 30, 2022, stockholders’ equity was primarily decreased by other comprehensive losses as the result of market value changes within the securities portfolio of ~~$62.1~~$84.1 million and dividends declared of ~~$2.7~~$4.0 million, offset by increased additional paid in capital related to the RYFL acquisition of $38.0 million and net income of ~~$6.6~~$11.1 million. On April 24, 2014, the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased under the program during the first ~~six~~nine months of 2022 or 2021. During 2022, 11,158 restricted stock shares vested under the Incentive Plan outlined in Note 910 of the financial statements, of which ~~2,449~~2,479 of these shares were withheld in the form of a net surrender to cover the withholding tax obligations of the vesting employees. The repurchase of these surrendered shares is considered outside of the scope of the formal board approved stock repurchase program.

The Bank is subject to risk-based capital guidelines adopted by the FDIC. The regulations divide capital into multiple tiers. The first tier (Common Equity Tier 1 Capital) includes common shareholders’ equity, after deductions for various items including goodwill and certain other intangible assets, and after certain other adjustments. Common Equity Tier 1 Capital also includes accumulated other comprehensive income (for organizations that do not make opt-out elections). The next tier (Tier 1 Capital) is comprised of Common Equity Tier 1 Capital plus other qualifying capital instruments such as perpetual noncumulative preferred stock and junior subordinated debt issued to trusts, and other adjustments. The third tier (Tier 2 Capital) includes instruments such as subordinated debt that have a minimum original maturity of at least five years and are subordinated to the claims of depositors and general creditors, total capital minority interest not included in Tier 1 Capital, and limited amounts of the allowance for loan losses, less applicable regulatory adjustments and deductions. The Bank is required to maintain a Common Equity Tier 1 Capital ratio of 4.5%, a Tier 1 Capital ratio of 6%, and a Total Capital ratio (comprised of Tier 1 Capital plus Tier 2 Capital) of 8%. In addition, the capital regulations provide for a minimum leverage ratio (Tier 1 capital to adjusted average assets) of 4%.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions by the institution and certain discretionary bonus payments to management if an institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the FRB to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries. However, under the FRB’s “Small Bank Holding Company” exemption from consolidated bank holding company capital requirements, bank holding companies and savings and loan holding companies with less than $3 billion in consolidated assets, such as the Bancorp, are exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases.

During the ~~six~~nine months ended ~~June~~September 30, 2022, the Bancorp’s and Bank’s risk weighted assets continued to be negatively impacted by regulatory requirements regarding collateralized debt obligations. The regulatory requirements state that for collateralized debt obligations that have been downgraded below investment grade by the rating agencies, increased ~~risk based~~risk-based asset weightings are required. The Bancorp currently holds pooled collateralized debt obligations with a cost basis of $2.2 million. These investments currently have ratings that are below investment grade. As a result, approximately ~~$8.6~~$8.5 million of risk-based assets are generated by the collateralized debt obligations in the Bancorp’s and Bank’s total risk based capital calculation.

In addition, the following table shows that, at ~~June~~September 30, 2022, and December 31, 2021, the Bank’s capital exceeded all applicable regulatory capital requirements. The dollar amounts are in millions.

(Dollars in millions)											Minimum Required To Be															Minimum Required To Be
						Minimum Required For					Well Capitalized Under Prompt										Minimum Required For					Well Capitalized Under Prompt
	Actual					Capital Adequacy Purposes					Corrective Action Regulations					Actual					Capital Adequacy Purposes					Corrective Action Regulations
June 30, 2022	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2022																Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$	155.5		10.5	%	$	66.6		4.5	%	$	96.2		6.5	%	$	158.4		11.8	%	$	60.2		4.5	%	$	87.0		6.5	%
Tier 1 capital to risk-weighted assets	$	155.5		10.5	%	$	88.8		6.0	%	$	118.3		8.0	%	$	158.4		11.8	%	$	80.3		6.0	%	$	107.1		8.0	%
Total capital to risk-weighted assets	$	168.9		11.4	%	$	118.3		8.0	%	$	147.9		10.0	%	$	171.8		12.8	%	$	107.1		8.0	%	$	133.8		10.0	%
Tier 1 capital to adjusted average assets	$	155.5		7.8	%	$	81.0		4.0	%	$	101.2		5.0	%	$	158.4		8.1	%	$	79.8		4.0	%	$	99.8		5.0	%

(Dollars in millions)											Minimum Required To Be														Minimum Required To Be
						Minimum Required For					Well Capitalized Under Prompt									Minimum Required For Capital Adequacy Purposes					Well Capitalized Under Prompt
	Actual					Capital Adequacy Purposes					Corrective Action Regulations				Actual									Corrective Action Regulations
At December 31, 2021	Amount		Ratio			Amount		Ratio			Amount		Ratio		Amount		Ratio			Minimum Required For Capital Adequacy Purposes		Amount		Ratio			Amount		Ratio
Common equity tier 1 capital to risk-weighted assets	$	136.6		13.0	%	$	47.4		4.5	%		N/A		N/A	$	136.6		13.0	%	$	47.4		4.5	%		N/A		N/A
Tier 1 capital to risk-weighted assets	$	136.6		13.0	%	$	63.3		6.0	%		N/A		N/A	$	136.6		13.0	%	$	63.3		6.0	%		N/A		N/A
Total capital to risk-weighted assets	$	149.8		14.2	%	$	84.3		8.0	%		N/A		N/A	$	149.8		14.2	%	$	84.3		8.0	%		N/A		N/A
Tier 1 capital to adjusted average assets	$	136.6		8.6	%	$	64.2		4.0	%		N/A		N/A	$	136.6		8.6	%	$	64.2		4.0	%		N/A		N/A

The Bancorp’s ability to pay dividends to its shareholders is entirely dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. The aggregate amount of dividends that may be declared by the Bank in 2022, without the need for qualifying for an exemption or prior DFI approval, is its 2022 net profits plus $21.4 million. Moreover, the FDIC and the Federal Reserve Board may prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. On ~~May 20,~~August 29, 2022, the Board of Directors of the Bancorp declared a second quarter dividend of $0.31 per share. The Bancorp’s second quarter dividend was paid to shareholders on ~~July 7,~~October 5, 2022.

Results of Operations - Comparison of the ~~Three Months~~Quarter Ended ~~June~~September 30, 2022 to the ~~Three Months~~Quarter Ended ~~June~~September 30, 2021

For the ~~three months~~quarter ended ~~June~~September 30, 2022, the Bancorp reported net income of ~~$4.4~~$4.6 million, compared to net income of ~~$3.6~~$3.5 million for the ~~three months~~quarter ended ~~June~~September 30, 2021, an increase of ~~$860 thousand (24.1%~~$1.0 million (28.8%). For the ~~three months,~~quarter, the ROA was ~~0.85%~~0.88%, compared to ~~0.90%~~0.87% for the ~~three months~~quarter ended ~~June~~September 30, 2021. The ROE was ~~12.45%~~13.65% for the ~~three months~~quarter ended ~~June~~September 30, 2022, compared to ~~9.17%~~8.90% for the ~~three months~~quarter ended ~~June~~September 30, 2021.

Net interest income for the ~~three months~~quarter ended ~~June~~September 30, 2022, was ~~$17.3~~$17.5 million, an increase of ~~$5.4~~$5.3 million ~~(45.7%~~(43.5%), compared to ~~$11.9~~$12.2 million for the ~~three months~~quarter ended ~~June~~September 30, 2021. The weighted-average yield on interest-earning assets was ~~3.68%~~3.88% for the ~~three months~~quarter ended ~~June~~September 30, 2022, compared to ~~3.38%~~3.36% for the ~~three months~~quarter ended ~~June~~September 30, 2021. The weighted-average cost of funds for the ~~three months~~quarter ended ~~June~~September 30, 2022 was ~~0.09%~~0.22% compared to ~~0.16%~~0.13% for the ~~three months~~quarter ended ~~June~~September 30, 2021. The impact of the ~~3.68%~~3.88% return on interest earning assets and the ~~0.09%~~0.22% cost of funds resulted in an interest rate spread and margin of ~~3.59%~~3.67% for the current ~~three months, a~~quarter, an increase from the ~~3.22%~~3.23% spread for the ~~three months~~quarter ended ~~June~~September 30, 2021. The Bancorp’s net interest margin on a tax-adjusted basis was ~~3.78%~~3.84% for the ~~three months~~quarter ended ~~June~~September 30, 2022, compared to ~~3.42%~~3.46% for the ~~three months~~quarter ended ~~June~~September 30, 2021. The Bancorp believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Tax adjusted net interest margin represents a non-GAAP financial measure. See the non-GAAP reconciliation table immediately below and the section captioned “Non-GAAP Financial Measures” for further disclosure regarding non-GAAP financial measures.

(Dollars in thousands)	Three Months Ended						Quarter Ended
(unaudited)	June 30, 2022			June 30, 2021			September 30, 2022			September 31, 2021
Calculation of tax adjusted net interest margin
Net interest income	$	17,298		$	11,872		$	17,507		$	12,200
Tax adjusted interest on securities and loans		930			745			817			851
Adjusted net interest income		18,228			12,617			18,324			13,051
Total average earning assets		1,927,664			1,473,625			1,910,722			1,506,674
Tax adjusted net interest margin		3.78	%		3.42	%		3.84	%		3.46	%

Information relating to the average consolidated balance sheet and the yield on average earning assets and cost of average liabilities for the periods indicated are in the following table. Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities drives the disclosed rates. Average balances are derived from daily balances.

Three Months Ended
Quarter Ended
(Dollars in thousands)	Average Balances, Interest, and Rates														Average Balances, Interest, and Rates
(unaudited)	June 30, 2022							June 30, 2021							September 30, 2022							September 30, 2021
	Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
ASSETS
Interest bearing deposits in other financial institutions	$	25,679		$	45		0.70	$	57,543		$	9		0.06	$	24,732		$	110		1.78	$	53,786		$	12		0.09
Federal funds sold		1,388			2		0.58		1,288			-		-		1,579			6		1.52		1,112			-		-
Certificates of deposit in other financial institutions		1,625			3		0.74		1,473			7		1.90		1,899			9		1.90		1,262			6		1.90
Securities available-for-sale		438,309			2,449		2.23		433,355			2,124		1.96		394,796			2,271		2.30		486,993			2,363		1.94
Loans receivable*		1,457,625			15,221		4.18		976,520			10,275		4.21		1,484,678			16,122		4.34		960,274			10,270		4.28
Federal Home Loan Bank stock		3,038			20		2.63		3,446			20		2.32		3,038			21		2.76		3,247			15		1.85
Total interest earning assets		1,927,664		$	17,740		3.68		1,473,625		$	12,435		3.38		1,910,722		$	18,539		3.88		1,506,674		$	12,666		3.36
Cash and non-interest bearing deposits in other financial institutions		21,435							36,377							21,954							41,378
Allowance for loan losses		(13,399	)						(13,255	)						(13,487	)						(13,688	)
Other noninterest bearing assets		149,339							97,863							149,950							97,290
Total assets	$	2,085,039						$	1,594,610						$	2,069,139						$	1,631,654

LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits	$	1,884,712		$	389		0.08	$	1,402,398		$	549		0.16	$	1,873,962		$	871		0.19	$	1,436,125		$	452		0.13
Repurchase agreements		22,618			26		0.46		16,855			12		0.28		20,781			51		0.98		20,970			13		0.25
Borrowed funds		9,851			27		1.10		1,720			2		0.47		17,456			110		2.52		41			1		9.76
Total interest bearing liabilities		1,917,181		$	442		0.09		1,420,973		$	563		0.16		1,912,199		$	1,032		0.22		1,457,136		$	466		0.13
Other noninterest bearing liabilities		25,443							17,787							23,458							15,508
Total liabilities		1,942,624							1,438,760							1,935,657							1,472,644
Total stockholders' equity		142,415							155,850							133,482							159,010
Total liabilities and stockholders' equity	$	2,085,039						$	1,594,610						$	2,069,139						$	1,631,654


Net intrest spread		3.59	%						3.22	%						3.67	%						3.23	%
Net interest margin**		3.59	%						3.22	%						3.67	%						3.24	%
Ratio of interest-earning assets to interest-bearing liabilities	1.01x							1.04x							1.00x							1.04x

* Non-accruing loans have been included in the average balances. ** Net interest income divided by average interest-earning assets.

The increased net interest income and net interest margin for the ~~three months~~quarter ended ~~June~~September 30, 2022, was primarily the result of the increased earning assets acquired through the RYFL acquisition, reallocation of securities cashflows into organic loan growth, and maintaining lower interest expense.

The following table shows the change in noninterest income for the ~~three months~~quarter ending ~~June~~September 30, 2022, and ~~June~~September 30, 2021.

(Dollars in thousands)	Three Months Ended June 30,				6/30/2022			vs. 6/30/2021			Quarter Ended September 30,				9/30/2022			vs. 9/30/2021
(unaudited)	2022		2021		$ Change			% Change
(Unaudited)											2022		2021		$ Change			% Change
Noninterest income:
Fees and service charges	$	1,560	$	1,471	$	89			6.1	%		1,570		1,473		97			6.6	%
Wealth management operations		588		576		12			2.1	%		407		604		(197	)		-32.6	%
Gain on sale of loans held-for-sale, net		291		1,116		(825	)		-73.9	%		344		1,229		(885	)		-72.0	%
Gain on sale of securities, net		258		269		(11	)		-4.1	%		23		590		(567	)		-96.1	%
Increase in cash value of bank owned life insurance		193		188		5			2.7	%		183		180		3			1.7	%
Gain (loss) on sale of foreclosed real estate		-		36		(36	)		-100.0	%
Gain on sale of foreclosed real estate												-		-		-			0.0	%
Other		6		24		(18	)		-75.0	%		103		70		33			47.1	%

Total noninterest income	$	2,896	$	3,680	$	(784	)		-21.3	%		2,630		4,146		(1,516	)		-36.6	%

The increase in fees and service charges is primarily the result of the acquisition of Royal and the resultant increase in our customer base. The decrease in wealth management operations is the result of lower fee income year over year due to market conditions. The decrease in gain on sale of loans is the result of significant refinance activity which started in 2020 and continued into 2021 due to the economic and low-rate environment, which resulted in more loans originated and sold. We expect demand for fixed rate mortgage loans held-for-sale in the secondary market to be lower as borrowing rates on loans increase. The ~~increase~~decrease in ~~fees and service charges~~gains on the sale of securities is ~~primarily the~~a result of current market conditions and actively repositioning the ~~acquisition of RYFL and the resultant increase in our customer base.~~portfolio.

The following table shows the change in noninterest expense for the ~~three months~~quarter ending ~~June~~September 30, 2022, and ~~June~~September 30, 2021.

(Dollars in thousands)	Three Months Ended June 30,				6/30/2022		vs. 6/30/2021			Quarter Ended September 30,				9/30/2022			vs. 9/30/2021
(Unaudited)	2022		2021		$ Change		% Change			2022		2021		$ Change			% Change
Noninterest expense:
Compensation and benefits	$	7,538	$	5,897	$	1,641		27.8	%		7,498		6,042		1,456			24.1	%
Data processing		1,246		597		649		108.7	%		1,212		872		340			39.0	%
Occupancy and equipment		1,729		1,324		405		30.6	%		1,804		1,380		424			30.7	%
Marketing		385		195		190		97.4	%		587		334		253			75.7	%
Federal deposit insurance premiums		380		204		176		86.3	%		350		236		114			48.3	%
Net loss recognized on sale of premises and equipment											254		-		254			0.0	%
Other		3,898		2,793		1,105		39.6	%		3,305		3,537		(232	)		-6.6	%

Total noninterest expense	$	15,176	$	11,010	$	4,166		37.8	%		15,010		12,401		2,609			21.0	%

The increase in compensation and benefits is primarily the result of the ~~RYFL~~Royal acquisition, management’s continued focus on talent management, and wage inflation. The increase in data processing expense is primarily the result of increased system utilization due to growth of the Bank, and continued investment in technological advancements such as Salesforce and nCino. The increase in occupancy and equipment expense is primarily related to the ~~RYFL~~Royal acquisition and higher operating costs. Marketing expenses have increased to enhance brand recognition in new markets and gain more wallet share. The increase in federal deposit insurance premiums is primarily the result of growth of the bank’s average assets. The increase in data processing expense is due to increased system utilization due to growth of the Bank, and continued investment in technological advancements such as Salesforce and nCino. The increase in net loss recognized on sale of premises and equipment is the result of the sale of a branch to reduce future fixed costs, allowing for redeployment of a portion of occupancy expenses into building a digital-forward foundation so the Bancorp can better serve its customers. The decrease in other operating expenses is primarily ~~the result~~due to lower utilization of ~~one-time expenses~~outside consultants related to ~~the acquisition of RYFL, continued investments in strategic~~bank initiatives ~~focusing on growth of the organization, and inflationary pressures.~~

For the three months ended June 30, 2022, data processing expense totaled $1.2 million, a decrease of $1.8 million from the three months ended March 31, 2022 total of $3.1 million. The decrease for the three months ended June 30, 2022, is primarily related to $1.9 million in RYFL conversion expense recognized during the ~~three months ended March 31, 2022.~~quarter.

The provision for income taxes was ~~$587~~$571 thousand for the ~~three months~~quarter ended ~~June~~September 30, 2022, as compared to ~~$395~~$268 thousand for the ~~three months~~quarter ended ~~June~~September 30, 2021, an increase of ~~$192~~$303 thousand ~~(48.6%~~(113.1%). The effective tax rate was ~~11.7%~~11.1% for the ~~three months~~quarter ended ~~June~~September 30, 2022, as compared to ~~10.0%~~7.0% for the ~~three months~~quarter ended ~~June~~September 30, 2021. The Bancorp’s higher current ~~three months~~quarter effective tax rate is a result of higher earnings relative to tax preferred income.

Results of Operations - Comparison of the ~~Six~~Nine Months Ended ~~June~~September 30, 2022 to the ~~Six~~ Nine Months Ended ~~June~~September 30, 2021

For the ~~six~~nine months ended ~~June~~September 30, 2022, the Bancorp reported net income of ~~$6.6~~$11.1 million, compared to net income of ~~$8.1~~$11.7 million for the ~~six~~nine months ended ~~June~~September 30, 2021, a decrease of ~~$1.5 million (19.1%~~$530 thousand (4.5%). For the ~~six~~nine months ended, the ROA was ~~0.65%~~0.73%, compared to ~~1.04~~0.98 % for the ~~six~~nine months ended ~~June~~September 30, 2021. The ROE was ~~8.40%~~9.98% for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to ~~10.54%~~9.96% for the ~~six~~nine months ended ~~June~~September 30, 2021.

Net interest income for the ~~six~~nine months ended ~~June~~September 30, 2022, was ~~$32.8~~$50.3 million, an increase of ~~$8.9~~$14.2 million ~~(37.3%~~(39.4%), compared to ~~$23.9~~$36.1 million for the ~~six~~nine months ended ~~June~~September 30, 2021. The weighted-average yield on interest-earning assets was ~~3.59%~~3.69% for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to ~~3.48%~~3.44% for the ~~six~~nine months ended ~~June~~September 30, 2021. The weighted-average cost of funds for the ~~six~~nine months ended ~~June~~September 30, 2022, was ~~0.09%~~0.13% compared to ~~0.18%~~0.16% for the ~~six~~nine months ended ~~June~~September 30, 2021. The impact of the ~~3.59%~~3.69% return on interest earning assets and the ~~0.09%~~0.13% cost of funds resulted in an interest rate spread of ~~3.50%~~3.56% for the current ~~six~~nine months, which is an increase from the spread of ~~3.30%~~3.28% as of ~~June~~September 30, 2021. On a tax adjusted basis, the Bancorp’s net interest margin was ~~3.70%~~3.75% for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to ~~3.51%~~3.49% for the ~~six~~nine months ended ~~June~~September 30, 2021. The Bancorp believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Tax adjusted net interest margin represents a non-GAAP financial measure. See the non-GAAP reconciliation table immediately below and the section captioned “Non-GAAP Financial Measures” for further disclosure regarding non-GAAP financial measures.

(Dollars in thousands)	Six Months Ended						Nine Months Ended
(unaudited)	June 30, 2022			June 30, 2021			September 30, 2022			September 30, 2021
Calculation of tax adjusted net interest margin
Net interest income	$	32,833		$	23,918		$	50,340		$	36,118
Tax adjusted interest on securities and loans		1,896			1,422			2,713			2,273
Adjusted net interest income		34,729			25,340			53,053			38,391
Total average earning assets		1,874,835			1,445,263			1,886,853			1,465,675
Tax adjusted net interest margin		3.70	%		3.51	%		3.75	%		3.49	%

Year-to-Date
(Dollars in thousands)	Average Balances, Interest, and Rates														Average Balances, Interest, and Rates
(unaudited)	June 30, 2022							June 30, 2021							September 30, 2022							September 30, 2021
	Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)		Average Balance			Interest		Rate (%)
ASSETS				`
Interest bearing deposits in other financial institutions	$	24,032		$	53		0.44	$	54,195		$	21		0.08	$	24,268		$	163		0.90	$	53,774		$	33		0.08
Federal funds sold		4,683			2		0.09		1,040			-		-		3,561			8		0.30		1,064			-		-
Certificates of deposit in other financial institutions		1,674			6		0.72		1,535			15		1.95		1,750			15		1.14		1,443			21		1.94
Securities available-for-sale		474,016			5,024		2.12		408,753			4,065		1.99		447,319			7,295		2.17		435,119			6,428		1.97
Loans receivable*		1,366,900			28,507		4.17		976,059			21,021		4.31		1,406,591			44,629		4.23		970,740			31,291		4.30
Federal Home Loan Bank stock		3,530			42		2.38		3,681			40		2.17		3,364			63		2.50		3,535			55		2.07
Total interest earning assets		1,874,835		$	33,634		3.59		1,445,263		$	25,162		3.48		1,886,853		$	52,173		3.69		1,465,675		$	37,828		3.44
Cash and non-interest bearing deposits in other financial institutions		20,821							35,055							21,279							37,186
Allowance for loan losses		(13,383	)						(12,960	)						(13,418	)						(13,205	)
Other noninterest bearing assets		138,343							97,967							142,254							97,674
Total assets	$	2,020,616						$	1,565,325						$	2,036,968						$	1,587,330

LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits	$	1,813,254		$	726		0.08	$	1,375,429		$	1,200		0.17	$	1,833,712		$	1,597		0.12	$	1,395,883		$	1,652		0.16
Repurchase agreements		21,013			42		0.40		15,674			22		0.28		20,935			93		0.59		17,458			35		0.27
Borrowed funds		7,982			33		0.83		1,903			22		2.31		11,175			143		1.71		992			23		3.09
Total interest bearing liabilities		1,842,249		$	801		0.09		1,393,006		$	1,244		0.18		1,865,822		$	1,833		0.13		1,414,333		$	1,710		0.16
Other noninterest bearing liabilities		22,029							18,295							22,510							17,052
Total liabilities		1,864,278							1,411,301							1,888,332							1,431,385
Total stockholders' equity		156,338							154,024							148,636							155,945
Total liabilities and stockholders' equity	$	2,020,616						$	1,565,325						$	2,036,968						$	1,587,330


Net intrest spread		3.50	%						3.30	%						3.56	%						3.28	%
Net interest margin**		3.50	%						3.31	%						3.56	%						3.29	%
Ratio of interest-earning assets to interest-bearing liabilities	1.02		x					1.04		x					1.01x							1.04x

* Non-accruing loans have been included in the average balances. ** Net interest income divided by average interest-earning assets.

The increased net interest income and net interest margin for the ~~six~~nine months ended ~~June~~September 30, 2022, was primarily the result of the increased earning assets acquired through the RYFL acquisition, reallocation of securities cashflows into organic loan growth, and maintaining lower interest expense.

The following table shows the change in noninterest income for the ~~six~~nine months ending ~~June~~September 30, 2022, and ~~June~~September 30, 2021.

(Dollars in thousands)	Six Months Ended June 30,				6/30/2022			vs. 6/30/2021			Nine Months Ended September 30,				9/30/2022			vs. 9/30/2021
(unadited)	2022		2021		$ Change			% Change
(Unaudited)											2022		2021		$ Change			% Change
Noninterest income:
Fees and service charges	$	2,864	$	2,537	$	327			12.9	%		4,434		4,010		424			10.6	%
Wealth management operations		1,183		1,183		0			0.0	%		1,590		1,787		(197	)		-11.0	%
Gain on sale of loans held-for-sale, net		898		3,165		(2,267	)		-71.6	%		1,242		4,394		(3,152	)		-71.7	%
Gain on sale of securities, net		639		686		(47	)		-6.9	%		662		1,276		(614	)		-48.1	%
Increase in cash value of bank owned life insurance		445		357		88			24.6	%		628		537		91			16.9	%
Gain (loss) on sale of foreclosed real estate		-		27		(27	)		-100.0	%
Gain on sale of foreclosed real estate												-		27		(27	)		-100.0	%
Other		11		38		(27	)		-71.1	%		114		108		6			5.6	%

Total noninterest income	$	6,040	$	7,993	$	(1,953	)		-24.4	%		8,670		12,139		(3,469	)		-28.6	%

The increase in fees and service charges, for the quarter and the year-to-date periods, is primarily the result of the acquisition of Royal and the resultant increase in our customer base. The decrease in wealth management operations is the result of lower fee income year over year due to market conditions. The decrease in gain on sale of loans, for the quarter and the year-to-date periods, is the result of significant refinance activity which started in 2020 and continued into 2021 due to the economic and low-rate environment, which resulted in more loans originated and sold. We expect demand for fixed rate mortgage loans held-for-sale in the secondary market to be lower as borrowing rates on loans increase. The ~~increase~~decrease in ~~fees~~gains on the sale of securities, for the quarter and ~~service charges~~the year-to-date periods, is ~~primarily the~~a result of current market conditions and actively repositioning the ~~acquisition of RYFL and the resultant increase in our customer base.~~portfolio.

The following table shows the change in noninterest expense for the ~~six~~nine months ending ~~June~~September 30, 2022, and ~~June~~September 30, 2021.

(Dollars in thousands)	Six Months Ended June 30,				6/30/2022		vs. 6/30/2021			Nine Months Ended September 30,				9/30/2022		vs. 9/30/2021
(unaudited)	2022		2021		$ Change		% Change
(Unaudited)										2022		2021		$ Change		% Change
Noninterest expense:
Compensation and benefits	$	14,905	$	11,582	$	3,323		28.7	%		22,403		17,624		4,779		27.1	%
Data processing		4,300		1,125		3,175		282.2	%		5,512		1,997		3,515		176.0	%
Occupancy and equipment		3,229		2,696		533		19.8	%		5,033		4,076		957		23.5	%
Marketing		1,036		394		642		162.9	%		1,623		728		895		122.9	%
Federal deposit insurance premiums		599		384		215		56.0	%		949		620		329		53.1	%
Net loss recognized on sale of premises and equipment											254		-		254		0.0	%
Other		7,376		5,322		2,054		38.6	%		10,681		8,859		1,822		20.6	%

Total noninterest expense	$	31,445	$	21,503	$	9,942		46.2	%		46,455		33,904		12,551		37.0	%

The increase in compensation and benefits is primarily the result of the ~~RYFL~~Royal acquisition, management’s continued focus on talent management, and wage inflation. The increase in occupancy and equipment expense is primarily related to the ~~RYFL~~Royal acquisition and higher operating costs. Marketing expenses have increased to enhance brand recognition in new markets and gain more wallet share. The increase in federal deposit insurance premiums is primarily the result of growth of the bank’s average assets. The increase in data processing expense is primarily the result of data conversion expenses related to the acquisition of ~~RYFL,~~Royal, increased system utilization due to growth of the Bank, and continued investment in technological advancements such as Salesforce and nCino. The increase in net loss recognized on sale of premises and equipment is the result of the sale of a branch to reduce future fixed costs, allowing for redeployment of a portion of occupancy expenses into building a digital-forward foundation so that the Bank can better serve its customers. The increase in other operating expenses is primarily the result of one-time expenses related to the acquisition of ~~RYFL,~~Royal, continued investments in strategic initiatives focusing on growth of the organization, and inflationary pressures.

The provision for income taxes was ~~$862 thousand~~$1.4 million for the ~~six~~nine months ended ~~June~~September 30, 2022, as compared to ~~$1.1~~$1.4 million for the ~~six~~nine months ended ~~June~~September 30, 2021, ~~a decrease~~an increase of ~~$278~~$25 thousand ~~(24.4%~~(1.8%). The effective tax rate was ~~11.6%~~11.4% for the ~~six~~nine months ended ~~June~~September 30, 2022, as compared to ~~12.3%~~10.8% for the ~~six~~nine months ended ~~June~~September 30, 2021. The Bancorp’s ~~lower~~higher current ~~period~~ effective tax rate is a result of ~~a greater increase~~nondeductible acquisition costs incurred in ~~tax preferred income relative to earnings.~~2022.

Critical Accounting Policies

Critical accounting policies are those accounting policies that management believes are most important to the portrayal of the Bancorp’s financial condition and that require management’s most difficult, subjective or complex judgments. The Bancorp’s critical accounting policies from December 31, 2021, remain unchanged.

Forward-Looking Statements

Statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are also intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. The Bancorp cautions readers that forward-looking statements, including without limitation those relating to the Bancorp’s future business prospects, merger and acquisition activities, interest income and expense, net income, liquidity, and capital needs are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this report, including those identified in the Bancorp’s 2021 Form 10-K.

Non-GAAP Financial Measures

This filing includes certain financial measures that are identified as non-GAAP, including adjusted net interest income and tax adjusted net interest margin. The Bancorp provides these non-GAAP performance measures because they are used by management to evaluate and measure the Bancorp’s performance, which the Bancorp believes also is useful to assist investors in assessing the Bancorp’s operating performance. Where non-GAAP financial measures are used in this report, the most comparable GAAP measure, as well as the reconciliation to the most comparable GAAP measure, can be found in the tables referenced herein.

The adjusted net interest income and tax-adjusted net interest margin measures recognize the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans are presented using the current federal income tax rate of 21%. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes.

Although these non-GAAP financial measures are frequently used by investors to evaluate a financial institution’s business and performance, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business operations and performance.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures.

The Bancorp maintains disclosure controls and procedures (as defined in Sections 13a – 15(e) and 15d – 15(e)) of regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Bancorp in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bancorp's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The Bancorp's Chief Executive Officer and Chief Financial Officer evaluate the effectiveness of the Bancorp's disclosure controls and procedures as of the end of each quarter. Based on that evaluation as of ~~June~~September 30, 2022, the Bancorp’s Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective as of that date in ensuring that information required to be disclosed by the Bancorp under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

~~(b)~~

(b) Changes in Internal Control Over Financial Reporting.

There was no change in the Bancorp's internal control over financial reporting identified in connection with the Bancorp’s evaluation of controls that occurred during the ~~six~~nine months ended ~~June~~September 30, 2022, that has materially affected, or is reasonably likely to materially affect, the Bancorp's internal control over financial reporting.

PART II ‑ Other Information

Item 1.

Legal Proceedings

The Bancorp and its subsidiaries, from time to time, are involved in legal proceedings in the ordinary course of business against its debtors and are defendants in legal actions arising from normal business activities. Management, after consultation with legal counsel believes that the ultimate liabilities, if any, resulting from these actions will not have a material adverse effect on the financial position of the Bank or on the consolidated financial position of the Bancorp.

Item 1A.

Risk Factors

Not Applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On April 24, 2014 the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased during the ~~six~~nine months ended ~~June~~September 30, 2022 under the stock repurchase program.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Program(1)
January 1, 2022 – January 31, 2022		-		N/A		-		48,828
February 1, 2022 – February 28, 2022		-		N/A		-		48,828
March 1, 2022 – March 31, 2022		-		N/A		-		48,828
April 1, 2022 – April 30, 2022		-		N/A		-		48,828
May 1, 2022 – May 31, 2022		-		N/A		-		48,828
June 1, 2022 – June 30, 2022		-		N/A		-		48,828
July 1, 2022 – July 31, 2022		-		N/A		-		48,828
August 1, 2022 – August 31, 2022		-		N/A		-		48,828
September 1, 2022 – September 30, 2022		-		N/A		-		48,828

(1)

The stock repurchase program was announced on April 24, 2014, whereby the Bancorp is authorized to repurchase up to 50,000 shares of the Bancorp’s common stock outstanding. There is no express expiration date for this program.

Item 3.

Defaults Upon Senior Securities

There are no matters reportable under this item.

Item 4.

Mine Safety Disclosures

Not Applicable

Item 5.

Other Information

None

Item 6.

Exhibits

	Exhibit
	Number	Description

	~~10.1~~	Employment Agreement between Finward Bancorp, Peoples Bank and Todd M. Scheub dated as of April 27, 2022 (incorporated herein by reference to Exhibit 10.1 to the Bancorp’s Form 8-K dated April 28, 2022).
	~~10.2~~	Extension Agreement between Finward Bancorp, Peoples Bank and David A. Bochnowski effective as of June 28, 2022 (incorporated herein by reference to Exhibit 10.1 to the Bancorp’s Form 8-K dated May 23, 2022).
	~~10.3~~	Post 2004 Deferred Compensation Plan for the Directors of Peoples Bank, Amended and Restated Effective May 20, 2022 (incorporated herein by reference to Exhibit 10.2 to the Bancorp’s Form 8-K dated May 23, 2022).
	31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
	31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
	32.1	Section 1350 Certifications.
	101	The following materials from the Bancorp’s Form 10-Q for the quarterly period ended ~~June~~September 30, 2022, formatted in an Inline XBRL Interactive Data File: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Changes in Stockholders’ Equity; (iv) Consolidated Statement of Comprehensive Income; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements, with detailed tagging of notes and financial statement schedules.
	104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

4344

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FINWARD BANCORP



Date: November 14, 2022	/s/ Benjamin J. Bochnowski
	Benjamin J. Bochnowski
	President and Chief Executive Officer



Date: ~~August 15, 2022~~	~~/s/ Benjamin J. Bochnowski~~
	~~Benjamin J. Bochnowski~~
	~~President and Chief Executive Officer~~



~~Date: August 15,~~November 14, 2022	/s/ Peymon S. Torabi
	Peymon S. Torabi
	Executive Vice President, Chief Financial
	Officer and Treasurer

4445

(Dollars in thousands)	June 30, 2022 (unaudited)			December 31, 2021

ASSETS

Cash and non-interest bearing deposits in other financial institutions	$	20,844		$	12,725
Interest bearing deposits in other financial institutions		55,602			19,987
Federal funds sold		2,856			464

Total cash and cash equivalents		79,302			33,176

Certificates of deposit in other financial institutions		1,482			1,709

Securities available-for-sale		400,466			526,889
Loans held-for-sale		1,525			4,987
Loans receivable, net of deferred fees and costs		1,474,381			966,720
Less: allowance for loan losses		(13,406	)		(13,343	)
Net loans receivable		1,460,975			953,377
Federal Home Loan Bank stock		3,038			3,247
Accrued interest receivable		6,892			5,444
Premises and equipment		45,985			31,385
Cash value of bank owned life insurance		31,571			31,440
Goodwill		22,615			11,109
Other intangible assets		5,588			3,126
Other assets		42,046			14,854

Total assets	$	2,101,485		$	1,620,743

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Non-interest bearing	$	370,567		$	295,294
Interest bearing		1,546,648			1,138,907
Total		1,917,215			1,434,201
Repurchase agreements		24,536			14,581
Accrued expenses and other liabilities		23,080			15,346

Total liabilities		1,964,831			1,464,128

Commitments and contingencies

Stockholders' Equity:
Preferred stock, no par or stated value; 10,000,000 shares authorized, none outstanding		0			0
Common stock, no par or stated value; 10,000,000 shares authorized; shares issued and outstanding: June 30, 2022 - 4,296,949 December 31, 2021 - 3,480,701
Additional paid-in capital		68,623			30,430
Accumulated other comprehensive (loss) income		(57,781	)		4,276
Retained earnings		125,812			121,909

Total stockholders' equity		136,654			156,615

Total liabilities and stockholders' equity	$	2,101,485		$	1,620,743

	Ending Balances

(Dollars in thousands)	Individually evaluated for impairment reserves		Collectively evaluated for impairment reserves		Loan receivables		Individually evaluated for impairment		Purchased credit impaired individually evaluated for impairment		Collectively evaluated for impairment

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at June 30, 2022:

Residential real estate	$	31	$	2,725	$	459,151	$	290	$	2,057	$	456,804
Home equity		3		370		35,672		21		133		35,518
Commercial real estate		446		5,081		420,735		846		2,970		416,919
Construction and land development		-		1,744		153,422		-		800		152,622
Multifamily		-		1,128		248,495		-		2,940		245,555
Commercial business		251		1,557		103,649		306		1,024		102,319
Consumer		-		70		1,673		-		20		1,653
Manufactured homes		-		-		37,693		-		-		37,693
Government		-		-		8,081		-		-		8,081
Total	$	731	$	12,675	$	1,468,571	$	1,463	$	9,944	$	1,457,164